Question

Bailand Company purchased a building for $210,000 that had an estimated residual value of $10,000 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.

Answer 1

Case-1
Cost of building			210000
Less: Salvage			10000
Depreciable cost			200000
Divide: Life f building			10
Annual depreciation			20000
Depreciation for 4 yrs			80000
Remaining Book value at end of 4yrs			130000
Less: Salvage			10000
Remaining depreciable cost			120000
Divide: Life of building			8
Annual depreciation(revised)			15000
Journal entries:
Date	Accounts title and explanations				Debit $	Credit $
Yr5 End	Depreciation expense Account Dr.				15000
	Accumulated depreciation Account					15000
Case-2
Remaining Book value at end of 4yrs			130000
Less: Salvage			10000
Depreciable cost			120000
Sum of years digit for remaining 6yrs			21
	(6+5+4+3+2+1)
Depreciation of 5th year			34285.71
	(120000/21*6)
Journal entries:
Date	Accounts title and explanations				Debit $	Credit $
Yr5 End	Depreciation expense Account Dr.				34285.71
	Accumulated depreciation Account					34285.71
Case-3
Depreciation to be charged for 4 yrs under SLM					80000
Depreciation which hass been charged					84000
(210000/10*4)
Depreciation overcharged					4000
Annual depreciation under SLM for 5th year					20000
Journal entries:
Date	Accounts title and explanations				Debit $	Credit $
Yr5 End	Depreciation expense Account Dr.				20000
	Accumulated depreciation Account					20000
Yr5 End	Accumulated depreciation Dr.				4000
	Retained earnings					4000