Irwin, Inc., constructed a machine at a total cost of $25 million. Construction

Question

Irwin, Inc., constructed a machine at a total cost of $25 million. Construction was completed at the end of 2012 and the machine was placed in service at the beginning of 2013. The machine was being depreciated over a 10-year life using the sum-of-the-years’-digits method. The residual value is expected to be $3 million. At the beginning of 2016, Irwin decided to change to the straight-line method.

Ignoring income taxes, prepare the journal entry relating to the machine for 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Irwin, Inc., constructed a machine at a total cost of $25 million. Construction was completed at the end of 2012 and the machine was placed in service at the beginning of 2013. The machine was being depreciated over a 10-year life using the sum-of-the-years’-digits method. The residual value is expected to be $3 million. At the beginning of 2016, Irwin decided to change to the straight-line method.

Explanation / Answer

Cost of the machine = $25 million Machine was put to use in 2013 Residual value of machine = $3 million Useful life of machine = 10 years Amount to be depreciated over 10 years of machine life = $25 million - $3 million = $22 million Depreciation using sum of the years digit method Digits in the years of machine useful life are summed = n(n+1) / 2 = 10(10+1) / 2 = 55 Year Multplication factor to amount to be depreciated Depreciation 2013 10/55 $4.00 million 2014 09/55 $3.60 million 2015 08/55 $3.20 million Total depreciation till 2015 $10.80 million Depreciation using straight line method Depreciation per year = (cost - residual value) / useful life = $22 million / 10 years = $2.2 million per year Hence for total depreciation for 2013,2014 and 2015 will be = $2.2 * 3 = $6.6 million At the beginning of 2016 , Irwin decided to change to straight line method. Difference in depreciation under both method = $10.8 million - $6.6 million = $4.2 million Journal entries in 2016 are as under Date Account Title Debit Credit in Millions In Millions 31/12/2016 Accumulated depreciation $4.20 Retained earnings $4.20 (depreciation difference of prevoius 3 years under both method adjusted under retained earnings) 31/12/2016 Depreciation $2.20 Accumulated depreciation $2.20 (Depreciation recorded under straight line method)

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