Question

Infosys Corp, purchased an equipment for $410,000 which was estimated to have a useful life for 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on straight-line basis. In 2014 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time. The journal entry to correct the prior year’s depreciation is: Select one: a. Depreciation Account (Dr.) To Equipment Account (Cr.) $41,000 b. Depreciation Account (Dr.) To Equipment Account (Cr.) $5,000 c. Equipment Account (Dr.) To Depreciation Account (Cr.) $41,000 d. Equipment Account (Dr.) to Depreciation Account (Cr.) $36,000 e. No Entry

Answer 1

Answer:

Option E is Correct.

At the time of purchase:

Cost of Equipment = $410,000
Salvage Value = $10,000
Useful Life = 10 years

Annual Depreciation = (Cost of Equipment - Salvage Value) / Useful Life
Annual Depreciation = ($410,000 - $10,000) / 10
Annual Depreciation = $40,000

At the end of Year 7:

Accumulated Depreciation = 7 * $40,000
Accumulated Depreciation = $280,000

Book Value of Equipment = $410,000 - $280,000
Book Value of Equipment = $130,000

At the beginning of Year 8:

Book Value of Equipment = $130,000
Salvage Value = $5,000
Remaining Useful Life = 8 years

Annual Depreciation = (Book Value of Equipment - Salvage Value) / Remaining Useful Life
Annual Depreciation = ($130,000 - $5,000) / 8
Annual Depreciation = $15,625

On Change of Depreciation due to change in salvage value or useful life, no prior adjustment is made. The effect of change is upon the forthcoming years of assets by change of Depreciation expense per year.

Therefore, no prior adjustment would be made for change in depreciation.