Question

Exercise 22-13

Riverbed Co. purchased equipment for $573,000 which was estimated to have a useful life of 10 years with a salvage value of $10,200 at the end of that time. Depreciation has been entered for 7 years on a straight-line basis. In 2018, it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.

(a)		Prepare the entry (if any) to correct the prior years’ depreciation.
(b)		Prepare the entry to record depreciation for 2018.

Answer 1

• All working forms part of the answer
• Please note that ‘change in the estimate of Salvage life and Life of equipment’ is a ‘change in estimates’ and not ‘change in principal’. Hence, no entry will be required to correct prior years’ depreciation.
• Working

A	Original Cost	$              5,73,000.00
B	Salvage Value	$                 10,200.00
C=A-B	Depreciable base	$              5,62,800.00
D	Life (in years)	10
E=C/D	Annual Straight Line depreciation	$                 56,280.00
F=C x 7 years	SLM depreciation for 7 years	$              3,93,960.00
G=A-F	Book Value at the time of change in estimation	$              1,79,040.00
H	New Salvage Value	$                    5,000.00
I=G-H	New Depreciable base	$              1,74,040.00
J	New Life estimated (in years)	15
K=J - 7 years	Remaining useful life (In years)	8
L = I/K	New SLM depreciation [174040/8]	$                 21,755.00

All Journal Entry (ies)

Date	Accounts Title	Debit	Credit
a.	[No entry]
	[because, such changes are change of ‘estimates’ and not change of principals. This means No adjustments are required to correct prior years’ depreciation.
b.	Depreciation expenses - Equipment	$                 21,755.00
	Accumulated Depreciation – Equipment		$                 21,755.00
	(new depreciation based on new estimate recorded)