Question

Irwin, Inc., constructed a machine at a total cost of $57 million. Construction was completed at the end of 2014 and the machine was placed in service at the beginning of 2015. 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 2018, Irwin decided to change to the straight-line method.

Ignoring income taxes, prepare the journal entry relating to the machine for 2018

Answer 1

Sum of year digits method consider the remaining life of the asset

Depreciation = (Cost - salvage value)* remaining life of asset/ sum of the years digit

Sum of year digit = 1+2+3+4+5+6+7+8+9+10 = 55

Depreciation 2015 = 55*10/55 = 10 million

Depreciation 2016 = 55*9/55 = 9 million

Depreciation 2017 = 55*8/55 = 8 million

Book value at the end of 2017 will be

= 55 - 10 - 9 -8

= 28 millions

Remaining useful life 7 years

Depreciation as per straight line method

= Book value / remaining life

= 28 / 7

= 4 millions per year

Therefore the journal entry will be

= Depreciation ac. 400,000

To accumulated depreciation ac. 400,000

Or we can instead of crediting accumulated depreciation account we can credit machine account also directly

Depreciation ac. 400,000

To Machine ac. 400,000

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