Instructions Bailand Company purchased a building for $286,000 that had an estim

Question

Instructions Bailand Company purchased a building for $286,000 that had an estimated residual value of $6,000 and an estimated service life of 10 years. Bailand purchased the building 4 years ago and has used straight-line depreciation. At the beginning of the fifth year (before it records depreciation expense for the year), the following independent situations occur: 1. Bailand estimates that the asset has 8 years' life remaining (for a total of 12 years) 2. Bailand changes to the sum-of-the-years'-digits method 3. Bailand discovers that the estimated residual value has been ignored in the computation of depreciation expense. Required For each of the independent situations, prepare all the journal entries relating to the building for the fifth year. Ignore income taxes

Explanation / Answer

1. Depreciation A/c Dr 21000

To Accumulated Depreciation A/c. 21000

[ book value as on date = Original cost - residual value - depreciation for 4 years(Original cost-residual value/10years*4years) ]

= 286000-6000- (286000-6000/10*4)

= 168000

Depreciation for 5th year = Book value/8years

= 168000/8

= 21000

2. Depreciation A/c Dr 48000

To Accumulated depreciation A/c. 48000

[ Depreciation for 5th year = Book value as on date(As per above 1,) * Remaining life/sum of years]

= 168000*6years/21years

= 48000

( Sum of years = 6+5+4+3+2+1year = 21 years)

3. Depreciation A/c Dr 27600

To Accumulated Depreciation A/c 27600

[ Depreciation for 5th year= Book value as on date/6years]

=165600/6years

= 27600

( Book value as on date = Original cost - residual value - Depreciation for 4 years( Original cost/10years*4years)

= 286000 - 6000 - (286000/10*4)

= 165600

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