Question

CH: 20; Irwin, Inc., constructed a machine at a total cost of $79 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 sum-of-the-years’-digits method. The residual value is expected to be $2 million. At the beginning of 2016, Irwin decided to change to the straight-line method.

Ignoring income taxes, prepare the journal entry relating to the machine for 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Record the entry relating to the machine for 2016

Answer 1

Solution:
Journal entry:

Date	Particulars	Post Ref	Debit ($ in million)	Credit ($ in million)
	Depreciation expense		$13.475
	Accumulated depreciation			$13.475
	(To record adjusting depreciation entry)

Working Notes:
Depreciation = ((Cost of asset - Residual value)/Life of asset)
=($79 million - $2 million)/10 years
=7.7 million

Depreciation =Annual depreciation*Number of years
=$7.7 million * 3 years
=23.1 million

Compute depreciable value of machine at beginning of 4th years as give below:
Depreciable value = Original value - Depreciation for 3 years - Salvage value
= $79 million - $23.1 million -$2 million
=$53.9 million

Compute depreciation under sum of years digit method for 4th year as given below:
Depreciation = Depreciable value of asset*(remaining life of asset/Sum of number of years in life of asset)
=53.9 million*(7years/1+2+3+4+5+6+7)
=53.9 million*(7/28)
=13.475