Green Co. constructed a machine at a total cost of $70 million. Construction was
ID: 2482832 • Letter: G
Question
Green Co. constructed a machine at a total cost of $70 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 $4 million. At the beginning of 2016, Green decided to change to the straight-line method.
Required:
1. Ignoring income taxes, what journal entry(s) should Green record relating to the machine for 2016?
2. Suppose Green has been using the straight-line method and switches to the sum-of-the-years'-digits method. Ignoring income taxes, what journal entry(s) should Green record relating to the machine for 2016?
Explanation / Answer
Sum-of-Years-Digits requires a three-step calculation:
A change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. In other words, a change in the depreciation method is similar to changing the economic useful life of a depreciable asset, and therefore the two events should be reported the same way. Accordingly, Green reports the change prospectively; previous financial statements are not revised. Instead, the company simply employs the straight-line method from then on. The undepreciated cost remaining at the time of the change would be depreciated straight-line over the remaining useful life.
Depreciation under SLM :- Depreciation = (70-4)/10 = $ 6.6 mio $ Mio Cost Depreiciation Acc Depreciation Book Value 2013 70 6.6 6.6 63.4 2014 6.6 13.2 56.8 2015 6.6 19.8 50.2 Depreciation under Sum of years digit method :-Sum-of-Years-Digits requires a three-step calculation:
1. Find the SYD, with n representing the number of years of estimated useful life remaining as of the start of the fiscal year: n(n+1) ÷ 2 = SYD 2. Find the applicable fraction using this formula: n ÷ SYD = Applicable fraction 3. Calculate the depreciation expense using this formula: (Cost – Salvage value) × Applicable fraction = Depreciation expense Machine Cost = $ 70 Mio Residual Value = $ 4 mio Useful Life = 10 Years 1. SYD = 10(10+1)/2 = 55 2. Applicable Franction = 10/55 3. Depreciation expenses using sum of years digit method in year 1= (70-4)X 10/55 = $ 12 mio Depreication in Year 2 = 66 X 9/55 = $ 10.8 mio 9.6 Depreication in Year 3 = 66 X 8/55 = $ 9.6 mio Depreication in Year 4 = 66 X 7/55 = $ 8.4 mio $ Mio Cost Depreiciation Acc Depreciation Book Value 2013 70 12 12 58 2014 10.8 22.8 47.2 2015 9.6 32.4 37.6 1A change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. In other words, a change in the depreciation method is similar to changing the economic useful life of a depreciable asset, and therefore the two events should be reported the same way. Accordingly, Green reports the change prospectively; previous financial statements are not revised. Instead, the company simply employs the straight-line method from then on. The undepreciated cost remaining at the time of the change would be depreciated straight-line over the remaining useful life.
There is no entry required to Pass any entry in year 2016 for Depreciation as under the sum of digit method is higher than SLM. the Remaining Book value of Mio 37.6 $ will be allocated in the remaining 7 years after keeping $ 4 mio as a salvage value. I.e Depreciation from the year 2016 onwars will be = (37.6-4)/7 = $ 4.8 mio per year 2. if Method Change from SLM to sum of years digit method Book value at the beginning in Year 2016 under SLM = $ 50.2 mio Book value at the beginning in Year 2016 under sum of digit method = $ 37.6 mio Therefore the additional Depreciation of $ 50.2 mio- $ 37.6 mio = $ 12.6 mio in the year 2016 Entry to be passed for last year impact :- Mio $ Mio $ Debit Credit Depreciation 12.6 TO Accumulated Dep 12.6 Depreciation for the year Mio $ Mio $ Debit Credit Depreciation 8.4 TO Accumulated Dep 8.4Related Questions
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