Question

On January 1^st 2018, Box Inc. purchased a box-making machine for $300,000. They estimate that the machine has a service life of 7 years, and that the residual value of the machine at the end of its service life is $100,000. Box Inc uses the SYD method of depreciation for this machine.

On Jan 1st 2022, Box Inc revises the estimated service life of the machine to 9 years, and reduces the estimated residual value to $50,000. Box Inc also changes the depreciation method to straight-line depreciation.

Provide the journal entries for Jan 1^st 2022, when the service life and residual values of the machine is updated.

Provide the journal entries on Dec 31^st 2022 for the recognition of depreciation expense for 2022.

Answer 1

Sum of years digits method

Depreciable Base = Cost – Salvage Value

= 300000 - 100000

= $ 200000

= (remaining useful life / sum of digits ) * depreciable Base

Sum of digits = 1+2+3+4+5+6+7 = 28

Depreciation in 2018 to 21

= (7/28 ) * 200000 + (6/28) * 200000 + ( 5/28)*200000 + (4/28) * 200000

= 50000 + 42857.14 + 35714.28 + 28571.42

= $ 157142.84

= $ 157143

As per new method Depreciation expense

Straight line depreciation

= (   cost – Salvage value ) / useful life of the asset

= ( 300000 - 50000 ) / 9

= $ 27777.77 per year

Depreciation Expense for 2018 - 2021 =   27777.77 * 3

= $ 83333.33

= $ 83333

Excess Depreciation provided

= 157143 - 83333

= $ 73810

Change in Accounting method requires Reteospective Effect

Journal Entries

Date	Accounts Name	Debit	Credit
1/1/2022	Accumulated Depreciation	73810
	Income Statement		73810
12/31/2022	Depreciation Expense	27777.77
	Accumulated Depreciation		27777.77