Question

Bailand Company purchased a building for $210,000 that had an estimated residual value of $10,000 and an estimated service life of 10 years. Bailand purchased the building 4 years ago and has used straight-line depreciation. At the beginning of the fifth year (before it records depreciation expense for the year), the following independent situations occur:

1.	Bailand estimates that the asset has 8 years’ life remaining (for a total of 12 years).
2.	Bailand changes to the sum-of-the-years’-digits method.
3.	Bailand discovers that the estimated residual value has been ignored in the computation of depreciation expense.

	Required:
	For each of the independent situations, prepare all the journal entries relating to the building for the fifth year. Ignore income taxes.

CHART OF ACCOUNTS
Bailand Company
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 181 Building 198 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 531 Depreciation Expense 532 Bad Debt Expense 559 Miscellaneous Expenses

Bailand estimates that the asset has 8 years’ life remaining (for a total of 12 years). Prepare the journal entry on December 31 to record depreciation in the fifth year after the change in estimate. Ignore income taxes.

PAGE 16

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Prepare the journal entry on December 31 to record depreciation in the fifth year after the change in depreciation method. Round your answers to the nearest dollar.

PAGE 16

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Prepare the journal entries on December 31 to record the prior period adjustment for the error and depreciation in the fifth year. Ignore income taxes.

PAGE 16

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4

Answer 1

Journal entries :

No	Account and explanation	debit	credit
1	Depreciation expense (210000-10000-80000)/8	15000
	Accumulated depreciation-Building		15000
	(To record depreciation expense)
2	Depreciation expense (210000-10000-80000)*6/21	34286
	Accumulated depreciation-Building		34286
	(To record depreciation expense)
3	Depreciation expense (210000-80000)/6	20000
	Accumulated depreciation-Building		20000
	(To record depreciation expense)
	Accumulated depreciation-Building	4000
	Retained earnings		4000
	(To record over depreciation)

Working note for part 1 :

Previous Depreciation = Cost - salvage value / life of asset = 210000 - 10000 / 10 = 20000

Previous Depreciation for 4 years = 20000 * 4 = 80000

Book value in 5th year = 210000 - 80000 = 130000

Current depreciation = 130000 -10000 / 8 = 15000

Working note for part 2 :

Sum of year digit for 6 years = 6+5+4+3+2+1 = 21

depreciable cost = 130000 - 10000 = 120000

Depreciation on 5th year = 120000 /21* 6 = 34285.71

Working note for part 3 :

Depreciation to be charged for 4 years = 80000

Depreciation actually charged =( 210000 /10) * 4 = 84000

Depreciation overcharged = 84000 - 80000 = 4000