Question

Carla Cole Inc. acquired the following assets in January of 2015. Equipment, estimated service life, 5 years; salvage value, $16,000 $559,000 Building, estimated service life, 30 years; no salvage value $675,000 The equipment has been depreciated using the sum-of-the-years’-digits method for the first 3 years for financial reporting purposes. In 2018, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 30 years to 40 years, with no change in the estimated salvage value. The building is depreciated on the straight-line method.

(a) Prepare the general journal entry to record depreciation expense for the equipment in 2018.

(b) Prepare the journal entry to record depreciation expense for the building in 2018.

Answer 1

Equipment

Cost = 559,000

Estimated service life = 5 years

Salvage value = 16,000

Depreciation under the sum of the years digits method = (cost - salvage value) * number of years left / n(n+1)/2

n(n+1)/2 = 5(5+1)/2 = 15

Depreciation in the year 2015 = (559,000 - 16,000) * 5 / 15 = 181,000

Depreciation in the year 2016 = (559,000 - 16,000) * 4 / 15 = 144,800

Depreciation in the year 2017 = (559,000 - 16,000) * 3 / 15 = 108,600

Accumulated depreciation = 181,000 + 144,800 + 108,600 = 434,400

Book value at the end of 2017 = Cost - Accumulated depreciation = 559,000 - 434,400 = 124,600

Depreciation under Straight line method = (cost - salvage value) / useful life

= (124,600 - 16,000) / 2

= 54,300

(a)

Journal entry

Depreciation expense	54,300
Accumulated depreciation		54,300

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Building

Cost - 675,000

Estimated service life - 30 years

Salvage value - 0

Depreciation under Straight line method = (cost - salvage value) / useful life

= (675,000 - 0) / 30

= 22,500

Accumulated depreciation at the end of 2017 = 22,500*3 = 67,500

Book value at the end of 2017 = Cost - Accumulated depreciation

= 675,000 - 67,500

= 607,500

Revised useful life = 40 years

Remaining useful life = 40 - 3 = 37

Depreciation under Straight line method = (cost - salvage value) / useful life

= (607,500 - 0) / 37

= 16,419

Journal entry

Depreciation expense	16,419
Accumulated depreciation		16,419