Question

Irwin, Inc., constructed a machine at a total cost of $41 million. Construction was completed at the end of 2012 and the machine was placed in service at the beginning of 2013. 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 2016, Irwin decided to change to the sum-of-the-years’-digits method. Ignoring income taxes, prepare the journal entry relating to the machine for 2016.

Answer 1

ANSWER

Journal entry relating to the machine for 2016 :

Date	Accounts title	Dr.	Cr.
2016	Depreciation expense [Note-2]	$6,650,000
	To Accumulated Depreciation		$6,650,000
	[Being depreciation for 2016 charged as per Sum of year digit method]

Note:- 1. Depreciation as per the straight-line method = [ cost - residual value] / useful life of asset

= [$41,000,000 - $3,000,000] / 10

= $33000000 / 10

= $3,800,000 per year

Book value at 2016 beginning = cost - accumulated depreciation for 3 years (2013 - 2016)

= $41,000,000 - ($3,800,000 *3)

= $41,000,000 - $11,400,000

= $29,600,000

Remaining useful life = 10 years - 3 years

= 7 years

2. Depreciation as per sum-of-the-years'-digits method = Remaining useful life / sum of year digits * Depreciation base

= 7 years / [7*(7+1)/2] * ( $29,600,000- $3,000,000)

= 7 years / 28 years * $26,600,000

= $6,650,000

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