Question

Annual depreciation expense on a building purchased a few years ago (using the straight-line method) is $4,800. The cost of the building was $96,000. The current book value of the equipment (January 1, 2018) is $81,600. At the time of purchase, the asset was estimated to have a zero salvage value. On January 1, 2018, the company decided to reduce the original useful life by 25% and to establish a salvage value of $4,800. The firm also decided double-declining-balance depreciation was more appropriate. Ignore tax effects. Required: 1. Prepare the journal entry, if any, to report the accounting change under GAAP. 2. Record the annual depreciation for 2018.

Answer 1

Cost of Building = $96,000

Annual Depreciation using Straight Line method) = $4,800

Rate of Depreciation = ($4,800/$96,000)x100 = 5%

No Salvage Value

Useful Life of the Asset = $96000/$4800 = 20 Years

Revised Useful Life of Asset = 20 - (25% f 20) = 15 Years

Salvage Value = $4,800

Revised Depreciation = 5% x 2 = 10% (Declining Balance Depreciation)

Annual Depreciation for 2018 = Current Book Value x Rate of Depreciation

= $81,600 x 10% = $8,160

1. No Journal Entry is required to report the accounting change under the GAAP because the change occurred on 1st day of the year and the books of the previous year need not be adjusted. Only a footnote about the change in accounting method of depreciation would suffice the purpose of GAAP to report the change.

2. Journal Entry to record the Depreciation for 2018:

Debit Depreciation Account $8,160

Credit Building Account $8,160