Exercise 22-6 Kathleen Cole Inc. acquired the following assets in January of 201

Question

Exercise 22-6

Kathleen Cole Inc. acquired the following assets in January of 2012.

The equipment has been depreciated using the sum-of-the-years’-digits method for the first 3 years for financial reporting purposes. In 2015, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 30 years to 40 years, with no change in the estimated salvage value. The building is depreciated on the straight-line method.

(Round answers to 0 decimal places, e.g. 125. )

No.

Account Titles and Explanation

Debit

Credit

Equipment, estimated service life, 5 years; salvage value, $16,500 $447,450 Building, estimated service life, 30 years; no salvage value $790,200

Explanation / Answer

equipment asset is purchased at a cost of $ 447,450. The asset is expected to have a useful life of 5 years and then be sold for $16,500. This means that the asset's depreciable amount will be $430,950 to be expensed over its useful life of 5 years.

Next the digits in the years of the asset's useful life are summed: 1 + 2 + 3 + 4 + 5 = 15. In the first year of the asset's life, 5/15 of the depreciable amount (5/15 of $430,950) or $ 143,650 will be debited to Depreciation Expense and. In the second year of the asset's life, $114,920 (4/15 of $430,950) will be the depreciation amount. In the third year, $86,190 (3/15 of $430,950) will be the depreciation.total depreciation for first three years is=

= $ 143,650+$ 114,920+$ 86,190=$ 344,760

but change of depreciation method is change so calculation of depreciation expenses for the first three years under stright line methos= $ 447,450-$ 16,500*3/5

= $ 258,570

so extra depreciation expenses is revesed so this diffrence amount debited to asset a/c and credited to genararal reserve a/c =$ ( 344,760-258,570)

=$ 86,190

building total cost = $ 790,200

three years depreciation for the estimated useful life is 30 years under slm method=

$ 790,200*3/30= $ 79,020

but after third year estimated useful life is changed to 40 years

so depreciation cost fpr three years = 790,200*3/40= $ 59,265

so extra depreciation expenses is revesed so this diffrence amount debited to asset a/c and credited to genararal reserve a/c =$ ( 79,020- 59,265)= $ 19,755

figures in $

date particulars debit amount credit amount 31-12-2015 equipment a/c 86,190 general reserve a/c 86,190 31-12-2015 building a/c 19,755 general reserve a/c 19,755

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