Question

On January 1, 2019, Pronghorn Corporation purchased a building to use as its factory, and some equipment to manufacture its product. The following information was determined at the time of purchase:

		Cost		Useful Life		Residual Value		Depreciation
Building		$2,550,000		20 years		$510,000		Double Declining
Equipment		$1,060,000		25 years		$106,000		Straight-Line

On January 1, 2022, Pronghorn decided to change the depreciation method for the building to the straight-line method, as a result of a change in the pattern of benefits received. There was no change to the total useful life or the residual value of the building.

Pronghorn also decided that the equipment would have a total useful life of only 13 years, with a residual value of only $55,000. The depreciation method for the equipment did not change. Prepare the journal entries to record depreciation for both assets for 2022

Answer 1

journal entry for depreciation of building on 31-dec-2022 is:

Depreciation a/c - Dr $ 67,448

To building a/c $ 67,448.

journal entry for depreciation of equipment on 31-dec-2022 is:

Depreciation a/c - Dr $ 68,502

To building a/c $ 68,502.

Explanation:

Firstly we need to arrive at carrying amount at 01- January - 2022 for building and equipment because

i) for building there is a change in depreciation method when will rise to prospective effect.

ii) for equipment there is change in estimated residual value and life of the asset.

Calculation of carrying amount for building on 01-jan-2022 :

Following are the Steps involved in the calculation of depreciation expense using Double declining method :

1. Determine the initial cost of the asset at the time of purchasing.

2. Determine the salvage value of the asset i.e. the value at which the asset can be sold or disposed of after its useful life is over.

3. Determine the useful or functional life of the asset.

4. Calculate depreciation rate i.e. 1/useful life.

5. Multiply the beginning period book value by twice the depreciation rate to find the depreciation expense.

6. Deduct the depreciation expense from the beginning value to calculate the ending period value.

Therefore by appling the above steps:

Cost of the asset = $ 25,50,000

Salvage Value = $ 5,10,000

The useful life of the asset = 20 years

Depreciation rate = 1/useful life X 100= (1/20) X 100 = 5%

Double-declining balance formula = 2 X Cost of the asset X Depreciation rate.

Depreciation on 31-dec-2019 = 2 X $25,50,000 X 5%

= $ 2,55,000

Carrying amount on 31-Dec- 2019 = $ 25,50,000 - $2,55,000

= $22,95,000

Depreciation on 31-dec-2020 = 2 X $22,95,000 X 5%

= $ 2,29,500

Carrying amount on 31-Dec- 2020 = $ 22,95,000 - $2,29,500

= $20,65,500

Depreciation on 31-dec-2021 = 2 X $20,65,500 X 5%

= $ 2,06,550

Carrying amount on 31-Dec- 2021 = $ 20,65,500 - $2,06,550

= $ 18,58,950

From 01 - January - 2022 depreciation method for building changed to straight line method with same residual vale ($5,10,000) & life (20 years)

Depreciation on 31- dec- 2022 under straight line method for building is :

= (cost of the asset - residual value ) ÷ life of the asset

= ($18,58,950 - $5,10,000)÷ 20

= $ 67,447.5

= $ 67,448 ( rounded off)

Therefore journal entry for building on 31-dec-2022 is

Depreciation a/c - Dr $ 67,448

To building a/c $ 67,448.

Calculation of carrying amount for equipment on 01-jan-2022 :

Under straight line method : depreciation for 3 years

i.e., 1- jan- 2019 to 31- dec- 2021

= {(cost of the asset - residual value ) ÷ life of the asset } × 3

= {($10,60,000 - $ 1,06,000) ÷ 25 } × 3

= $ 1,14,480

Carrying amount on 1-jan-2022 is :

= $10,60,000 - $ 1,14,480

= $ 9,45,520

from 1-jan- 2022 we need to calculate depreciation by using revised residual value ($55,000) and life (13 years)

= ($9,45,520 - $55,000)÷ 13

= $65,502

Therefore journal entry for depreciation of equipment on 31-dec-2022 is:

Depreciation a/c - Dr $ 68,502

To building a/c $ 68,502.