Question

Exercise 22-11 Pina Co. purchased a equipment on January 1, 2015, for $577,500. At that time, it was estimated that the equipment would have a 10-year life and no salvage value. On December 31, 2018, the firm’s accountant found that the entry for depreciation expense had been omitted in 2016. In addition, management has informed the accountant that the company plans to switch to straight-line depreciation, starting with the year 2018. At present, the company uses the sum-of-the-years’-digits method for depreciating equipment.

Prepare the general journal entries that should be made at December 31, 2018, to record these events. (Ignore tax effects.)

Answer 1

Useful life = 10 years
Sum of digits = 10+9+8+7+6+5+4+3+2+1 = 55
Depreciation for Year 2016 = $577500*9/55 = $94500

Dec 31, 2018: Correction entry:
Retained earnings $94500
Depreciation expense $94500

Accumulated depreciation for 3 years
Year 1: 10/55 * $577500 = $105000
Year 2: $94500
Year 3 = 8/55 * $577500 = $84000
Total depreeciation = $283500
Book value as at Dec 2017 = $577500 - $283500 = $294000
Remianing useful life = 7 years
Depreciation as per straight line method = $294000/7 = $42000
Entry will be
Dec 31,2018 Depreciation $42000
Accumulated depreciation $42000