Question

Irwin, Inc. constructed a machine at a total cost of $23 million. Construction was completed at the end of 2017 and the machine was placed in service at the beginning of 2018. 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 2021, Irwin decided to change to the sum-of-the-years’-digits method.

Ignoring income taxes, prepare the journal entry relating to the machine for 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)
  
journal entry

Record the entry relating to the machine for 2021.

Answer 1

Solution:

Journal Entry for 2021: Depreciation Expense [Answer in Millions]

Date	Account Titles and Explanation	DEBIT	CREDIT
2021	Depreciation Expense	$           3.50
	Accumulated Depreciation- Machinery		$       3.50
	(To record depreciation expense)

Working:

1) Depreciation Per Year Under Straight Line Method = [ Cost - Residual Value ] / Useful Life

=[ $ 23 Million - $ 3 Million ] / 10 Years = $ 2 Million

2) Depreciation for 3 Years [ 2018, 2019, 2020 ] = $ 2 Million *3 = $ 6Million

3) Depreciation Under Sum-of-the-years’-digits method for 2021

= Depreciable Value * [Remaining Life / Sum of number of years in life of asset]

4) Depreciable Value = Cost - Depreciation for three years - Residual Value = $ 23 M - $6 M - $3 M = $ 14 Million

Year 2021 Depreciation = $ 14Million * [ 7 / 1+2+3+4+5+6+7] = $ 14Million * [ 7 / 28 ] = 3.5 Million