Question

CH 20; Irwin, Inc., constructed a machine at a total cost of $59 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 straight-line method. The residual value is expected to be $3 million. At the beginning of 2016, Irwin decided to change to the sum-of-the-years’-digits 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 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)

Record the entry relating to the machine for 2016

Answer 1

Solution

Journal entry:

Date	Particulars	Post Ref	Debit ($ in million)	Credit ($ in million)
	Depreciation expense		$9.8
	Accumulated depreciation			$9.8
	(To record adjusting depreciation entry)

Working Notes:
Depreciation = ((Cost of asset - Residual value)/Life of asset)
=($59 million - $3 million)/10 years
=5.6 million

Depreciation =Annual depreciation*Number of years
=$5.6 million * 3 years
= $16.8 million

Compute depreciable value of machine at beginning of 4th years as give below:
Depreciable value = Original value - Depreciation for 3 years - Salvage value
= $59 million - $16.8 million -$3 million
=$39.2 million

Compute depreciation under sum of years digit method for 4th year as given below:
Depreciation = Depreciable value of asset*(remaining life of asset/Sum of number of years in life of asset)
=39.2 million*(7years/1+2+3+4+5+6+7)
=39.2 million*(7/28)
=9.8 million