Question

Bailand Company purchased a building for $148,000 that had an estimated residual value of $8,000 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. Additional Instruction

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. Additional Instruction

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. Additional Instruction

PAGE 16

GENERAL JOURNAL

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

Answer 1

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Part 1
Annual Depreciation	($148,000-$8,000)/10 years		$ 14,000
4 Years Accumulated Depreciation	$14,000*4		$ 56,000
Book value at beginning of 5th Year	$148,000-$56,000		$ 92,000
Annual Depreciation after change in life	($92,000-$8,000)/8 years		$ 10,500
Account and Explanation	Debit	Credit
Depreciation Expense	$                                  10,500
Accumulated Depreciation		$ 10,500
(To record depreciation expense)
Part 2
Book value at beginning of 5th Year	$148,000-$56,000		$148,000
Remaining life	6 Years
Sum of Year Digit Method	(6*7)/2	21
Depreciation after change in method	($92,000-$8,000)*6/21		$ 24,000
Account and Explanation	Debit	Credit
Depreciation Expense	$                                  24,000
Accumulated Depreciation		$ 24,000
(To record depreciation expense)
Part 3
			Annual	for 4 years
Depreciation without Residual Value	$148,000/10 years		$ 14,800	$     59,200
Depreciation with residual value	($148,000-$8,000)/10 years		$ 14,000	$     56,000
Difference				$       3,200
Account and Explanation	Debit	Credit
Accumulated Depreciation	$                                    3,200
Retained Earning		$    3,200
(To record prior period adjustment error)
Depreciation Expense	$                                  14,000
Accumulated Depreciation		$ 14,000
(To record depreciation expense)