Question

Doug Smith Industries purchased warehouses for $209 million (no residual value) at the beginning of 2018....

Doug Smith Industries purchased warehouses for $209 million (no residual value) at the beginning of 2018. The warehouses were being depreciated over a 10-year life using the sum-of-the-years'-digits method. At the beginning of 2021, management decided to change to straight-line. Ignoring taxes, the 2021 adjusting entry will include a debit to depreciation expense of: (Round your answer to 2 decimal places.):

Multiple Choice

  • $20.90 million

  • $102.60 million

  • $106.40 million

  • $15.20 million

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Answer #1

The correct answer is option (D) $15.2 million

Purchase Cost - $209 million

Sum of Years' digits formula = N x ((N+1)/2) where N is useful life

2018 Depreciation - 10/55 * $209 million = $38 million

2019 Depreciation - 9/55 * $209 million = $34.2 million

2020 Depreciation - 8/55 * $209 million = $30.4 million

Accumulated Depreciation till December 31, 2020 = $38 m + $34.2 m + $30.4 m

= $102.6 million

Net Book Value as on December 31, 2020 = Purchase Cost - Accumulated Depreciation

= $209 m - $102.6 m

= $106.4 million

Depreciation per Straight Line Method for 2021 = NBV of warehouse as on 1/31/2021 / Useful Life Remaining

= 106.4 / 7

=$15.2 million

In case of any query/clarification please leave a comment below, if the answer was helpful please leave a thumbs up, Thanks!

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