Step 3: E11-11 (Depreciation—Change in Estimate) Machinery purchased for $60,000

Question

Step 3: E11-11 (Depreciation—Change in Estimate) Machinery purchased for $60,000 by Tom Brady Co. in 2003 was originally estimated to have a life of 8 years with a salvage value of $4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2008, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation. Instructions (a) Prepare the entry to correct the prior years’ depreciation, if necessary. (b) Prepare the entry to record depreciation for 2008. E11-11 (Depreciation—Change in Estimate) Machinery purchased for $60,000 by Tom Brady Co. in 2003 was originally estimated to have a life of 8 years with a salvage value of $4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2008, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation. Instructions (a) Prepare the entry to correct the prior years’ depreciation, if necessary. (b) Prepare the entry to record depreciation for 2008.

Explanation / Answer

Depreciation is to be calculated as follows: Original Cost = 60,000 Salvage value = $4,000 Depreciable value = $56,000 Depreciation per year = $56,000 ÷ 8 = $7,000 Less: Depreciation for first five years ($7,000 x 50 = $35,000 Book Value in the beginning of 2008 = $60,000 - $35,000 = $25,000 After reconsideration it is determined that Remaining life = 5 years Depreciable Value = 25,000 – 4500 = 20,500 Depreciation per year = 4100 So the Journal Entry for 2008 should be Depreciation Expenses $4,100 Accumulated Depreciation $4,100 (To record depreciation for the year 2008)

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