Question

Wardell Company purchased a minicomputer on January 1, 2016, at a cost of $43,000. The computer was depreciated using the straight-line method over an estimated five-year life with an estimated residual value of $10,000. On January 1, 2018, the estimate of useful life was changed to a total of 10 years, and the estimate of residual value was changed to $1,600.

Required:

1. Prepare the year-end journal entry for depreciation in 2018. No depreciation was recorded during the year.

2. Prepare the year-end journal entry for depreciation in 2018. Assume that the company uses the sum-of-the-years' -digits method instead of the straight-line method.

Answer 1

Wardell Company

Straight line method -

1. Adjusting entry to record depreciation:

Date	Account Titles and Explanation	Ref. Post	Debit	Credit
31-Dec-18	Depreciation Expense		$3,525
	Accumulated Depreciation			$3,525
	(To record depreciation expense for 2018)

Computations to reflect the revised estimates:

original cost	$43,000
original residual value	$10,000
depreciable base	$33,000
depreciation	33,000/5 years = $6,600
Accumulated depreciation for 2 years (2016 and 2017)	$13,200
book value as on Jan 1, 2018	43,000 - 13,200 = $29,800
revised residual value	$1,600
revised depreciable base	$28,200
revised useful life	10 years
remaining life	10-2 = 8 years
depreciation for 2018	28,200/8 = $3,525

Sum of years’ digits method –

Entry:

Date	Account Titles and Explanation	Ref. Post	Debit	Credit
31-Dec-18	Depreciation Expense		$4,800
	Accumulated Depreciation			$4,800
	(To record depreciation expense for 2018)

Computations:

original cost	$43,000
original residual value	$10,000
depreciable base	$33,000
depreciation, 2016	33,000 x 5/15 = $11,000
depreciation for 2017	33,000 x 4/15 = $8,800
Accumulated depreciation for two years	$19,800
book value as on Jan 1, 2018	43,000 - 19,800 = $23,200
revised residual value	$1,600
revised depreciable base	$21,600
revised useful life	10 years
remaining life	10-2 = 8 years
depreciation for 2018	21,600 x 8/36 = $4,800