Machinery purchased for $39,200 by Ayayai Corp. on January 1, 2012, was original

Question

Machinery purchased for $39,200 by Ayayai Corp. on January 1, 2012, was originally estimated to have an 8-year useful life with a residual value of $4,000. Depreciation has been entered for five years on this basis. In 2017, it is determined that the total estimated usful lfe (including 2017) should have been 10 years, with a residual value of $5,000 at the end of that time. Assume straight-line depreciation and that Ayayai Corp. uses IFRS for financial statement purposes. Prepare the entry that is required to correct the prior years' depreciation, if any. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit SHOW LIST OF ACCOUNTS LINK TO TEXT Prepare the entry to record depreciation for 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account tities and enter O for the amounts. Round answers to O decimal places, e.g. 5,275.) Account Titles and Explanation Debit Credit

Explanation / Answer

As per IAS 8

The effect of change in an accounting estimate shall be recognized prospectively by including it in profit or loss in : [ IAS 8.36}

In the given situation the change in the useful life and residual value of the machinery is the change in the accounting estimate and does not warrant adjustment retrospectively.

Hence no entry is needed for part 1

2. Value of Asset = 39,200

Residual Value = 4,000

Term - 8 Years

Method of Depreciation - Straight line

Annual depreciation = 39,200-4,400 / 8 = 4400

Depreciation for 5 years = 4400*5 = 22,000

Carrying Value of Machinery on 1 Jan 2017 = 39,200-22,000 = 17,200

Revised total term = 10 years

Balance term = 10-5 = 5 year (since asset is already depreciated for 5 year)

Revised Residual Value = 5,000

Depreciation for 2017 and future period = (17,200-5000) / 5 = 2440.

Entry -

Depreciation Debit $2440

Accumulated Depreciation Credit 2440.

3. As per ASPE 1506

A change in accounting estimate is an adjustment to an asset, liability, or periodic consumption of an asset that results from relevant new information or developments.

Recognition – prospective application: - Include the changes in net income (NI) in the period of the change and, if applicable, future periods.

Depreciation for a year = 39,200/8.5 = 4,612

Depreciation for 5 year = 4612*5 = 23,060

Carrying Value = 39,200 - 23,060 = 16,140

Residual Value = 300

Balance Term = 11-5= 6

Depreciation for 2017 and future years = 16,140-300 / 6 = 2,640

Entry -

Depreciation Debit $2,640

Accumulated Depreciation Credit 2,640.

4. In case of double declining method

Rate of Depreciation = 1/8 = 12.5%

under Double Declining Method = 12.5%*2 = 25%

Hence Depreciation for 2012 = (39,200-4000) *25% = 8,800.

Depreciation for 2013 = (35200-8800)*25% = 6,600

Depreciation for 2014 = (35200-8800-6600)*25% = 4,950

Depreciation for 2015 = (35200-8800-6600-4950)*25% = 3713

Depreciation for 2016 = (35200-8800-6600-4950-3713)*25% = 2784

Carrying Value for 2017 = (35200-8800-6600-4950-3713-2784) = 12,353.

Revised Depreciation rate = 1/10 = 10%

Under Double Declining Method = 10%*2 = 20%

Depreciation for 2017 = (12353-5000)*20% = 1,471 (rounded off)

Depreciation Debit $1,471

Accumulated Depreciation Credit 1,471

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