Question

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Ventura Corporation purchased machinery on January 1, 2009 for $630,000. The company used the sum-of-the-years’-digits method...

Ventura Corporation purchased machinery on January 1, 2009 for $630,000. The company used the sum-of-the-years’-digits method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. On January 1, 2011, Ventura changed to the straight-line depreciation method for this asset. The amount that Ventura should report for depreciation expense on its 2011 income statement is

A. $120,000

B. None of the above

C. $105,000

D.$75,000

Solutions

Expert Solution

Per IRS, the change in depreciation is a change in estimate and hence is considered "Prospective" and not "Retrospective". Under the prospective method of accounting, the depreciation expense for 2011 under Straight line method is calculated as follows:-

=(Cost of the asset - Salvage value)/Estimated life of the asset

Step 1:- Calculate the carrying value of the machinery on January 1, 2011:-

The depreciation expense under Sum of digits method for 2009 is :-

$630,000 * 6/21 = $180,000

Depreciation expense under Sum of digits method for 2010 is :-

$630,000 * 5/21 = $150,000

Carrying value of the machinery on January 1, 2011 = $630,000 - $180,000 - $150,000

Carrying value of the machinery = $300,000

Depreciation expense under straight line method = $300,000/ Estimated life of the asset remaining

=$300,000/4 years

=$75,000 per year between 2011 - 2014

Based on the above calculation, the correct answer is Option D - $75,000 under the straight line method of depreciation.

Option A and Option C are incorrect based on the above calculations.

Option B is incorrect because we have the answer at Option D and hence this option is invalid.

Please let me know if you have any questions via comments and all the best :)

ekkarill92 answered 2 years ago
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