In 20X0, ABC company purchased machine for $300,000 that had a useful life of 5 years, with a salvage value of $50,000 at the end its life. Depreciation was calculated over 2 years on straight-line basis. In 20X2, it determined that the total life should be 10 years with the salvage value of $5,000 at the end its life.
1. Prepare the entry to correct the depreciation for 20X1.
2. Prepare the entry to record the depreciation for 20X2.
I know for the 2nd entry it should be Debit Dep Expense $24,375 and Credit Acc Depreciation $24,375. Just confused about the correcting entry in 20X1.
To correct the depreciation for 20X1, we need to determine the difference in depreciation expense between the original calculation and the updated calculation.
First, we need to calculate the original annual depreciation expense. The machine was purchased for $300,000 and has a useful life of 5 years, with a salvage value of $50,000. Therefore, the depreciable base is $300,000 - $50,000 = $250,000.
The original annual depreciation expense is calculated as the depreciable base divided by the useful life:
Original annual depreciation expense = $250,000 / 5 = $50,000
However, in 20X2, it was determined that the total life should be 10 years, with a salvage value of $5,000. Let's recalculate the annual depreciation expense using the updated information.
The updated depreciable base is still $250,000, but the useful life is now 10 years, and the salvage value is $5,000.
Updated annual depreciation expense = ($250,000 - $5,000) / 10 = $24,500
Now, let's calculate the difference in depreciation expense between the original calculation and the updated calculation for 20X1:
Depreciation expense difference = Original annual depreciation expense - Updated annual depreciation expense
Depreciation expense difference = $50,000 - $24,500 = $25,500
Since the original depreciation expense was higher, we need to reduce the accumulated depreciation by the difference amount.
1. The entry to correct the depreciation for 20X1:
Debit Accumulated Depreciation $25,500
Credit Retained Earnings $25,500
This entry reduces the accumulated depreciation, which reduces the net book value of the machine and increases the retained earnings.
2. The entry to record the depreciation for 20X2:
Debit Depreciation Expense $24,500
Credit Accumulated Depreciation $24,500
This entry records the annual depreciation expense for 20X2, reducing the net book value of the machine further and increasing the accumulated depreciation.