Changes and Corrections of Depreciation On January 1, 2008, Klinefelter Company
ID: 2419921 • Letter: C
Question
Changes and Corrections of Depreciation
On January 1, 2008, Klinefelter Company purchased a building for $520,000. The building had an estimated life of 20 years and an estimated residual value of $20,000. The company has been depreciating the building using straight-line depreciation.
Required:
At the beginning of 2014, the following independent situations occur. For each of these situations, prepare all journal entries related to the building for 2014. Ignore income taxes.
a. The company estimates that the building has a remaining life of 10 years (for a total of 16 years)
b. The company changes to the sum-of-the-years'-digits method. Round your answer to nearest whole dollar.
c. The company discovers that it had ignored the estimated residual value in the computation of the annual depreciation each year.
Explanation / Answer
COST OF BUILDING=$5,20,000
USEFULL LIFE=20 YEARS
RESIDUAL VALUE=$20,000
DEPRECIATION USING STRAIGHT LINE METHOD=($5,20,000-$20,000)/20=$25,000
DEPRECIATION CHARGED UPTO 2013=$25,000*6 YEARS=$1,50,000
a) IF REMAINING LIFE IS 10 YEARS NEW DEPRECIATION=($5,20,000-$1,50,000-$20,000)/10=$35,000
JOURNAL ENTRY
PROFIT AND LOSS ACCOUNT $ 35,000
TO BUILDING $35,000
b)IF SUM OF YEAR DIGITS METHOD IS USED DEPRECIATION FOR 2014=($5,20,000-$1,50,000-$20,000)/105
=$3,333
PROFIT AND LOSS ACCOUNT $ 3,333
TO BUILDING $3,333
c)DEPRECIATION CHARGED UPTO 2013=($5,20,000/20)*6=$26,000*6=$1,56,000
DEPRECIATION FOR 2014=ACTUAL DEPRECIATION FOR 2014+DEPRECIATION NOT CHARGED UPTO 2013 DUE TO IGNORING RESIDUAL VALUE
=($5,20,000-20,000)/20+($1,56,000-$1,50,0000
=$31,000
JOURNAL ENTRY:
PROFIT AND LOSS ACCOUNT $31,000
TO BUILDING$31,000
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