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.
Prepare the entry to correct the depreciation for 20X1.
Prepare the entry to record the depreciation for 20X2.
To correct the depreciation for 20X1, we need to calculate the difference between the original depreciation calculated over 5 years and the new depreciation over 10 years.
First, let's calculate the original annual depreciation expense using the straight-line method:
Original cost of the machine = $300,000
Salvage value at the end of its life = $50,000
Depreciation expense = (Original cost - Salvage value) / Useful life
Depreciation expense = ($300,000 - $50,000) / 5 years
Depreciation expense = $250,000 / 5 years
Depreciation expense = $50,000 per year
The original depreciation expense was $50,000 per year. However, as we now know that the useful life is actually 10 years with a salvage value of $5,000, we need to adjust the depreciation for the previous years.
To correct the depreciation for 20X1, we need to calculate the difference between what was previously recorded and what should have been recorded:
Previous depreciation expense per year = $50,000
Corrected depreciation expense per year = (Original cost - Salvage value) / Useful life
Corrected depreciation expense per year = ($300,000 - $5,000) / 10 years
Corrected depreciation expense per year = $295,000 / 10 years
Corrected depreciation expense per year = $29,500 per year
Difference in depreciation expense = Corrected depreciation expense - Previous depreciation expense
Difference in depreciation expense = $29,500 - $50,000
Difference in depreciation expense = -$20,500
Since the original depreciation expense was overstated, we need to reduce the accumulated depreciation by the difference of $20,500. Therefore, the entry to correct the depreciation for 20X1 is as follows:
Debit: Accumulated Depreciation $20,500 (to reduce the accumulated depreciation account)
Credit: Depreciation Expense $20,500 (to reverse the previously recorded expense)
Now, let's prepare the entry to record the depreciation for 20X2. Since we now know that the total life is 10 years, we can calculate the depreciation expense for the remaining 8 years. The salvage value at the end of its life is $5,000.
Depreciation expense per year = (Original cost - Salvage value) / Remaining useful life
Depreciation expense per year = ($300,000 - $5,000) / 8 years
Depreciation expense per year = $295,000 / 8 years
Depreciation expense per year = $36,875 per year
The entry to record the depreciation for 20X2 is as follows:
Debit: Depreciation Expense $36,875 (to record the expense for the current year)
Credit: Accumulated Depreciation $36,875 (to increase the accumulated depreciation account)