Question

Eagle River Inc. purchased a machine for $ 610,000 which was estimated to have a useful life of 10 years with a salvage value of $ 10,000 at the end of that time. Depreciation has been entered for 7 years on a straight-line basis. In 2016, it is determined that the total estimated life should be 15 years with a salvage value of $ 10,000 at the end of that time.

Required:

1. Indicate how this change should be treated in the financial statements.
2. Prepare the journal entry that should be made for 2016.

Answer 1

In Financial Statement, Depreciation will be recorded with revised Depreciation amount as per revised remaning life of Depreciation1 . No any other change in prior period Accumulated depreciation will be made.

Date	Account Tittle & Explanation	Debit	Credit
31-Dec-16	Depreciation Expense	$22,500.00
	Accumulated Depreciation- Machinery		$22,500.00

Working Note

Annual Depreciation = ( Original Cost- Residual Value)/Estimated useful Life	$60,000.00
=(610000-10000)/10= 60000
Accumulated Depreciation Expense for 7 year (7*60000)	$420,000.00
Book Value on 1 Jan 2016 (610000-420000)	$190,000.00
Revised Life = 15 Year
Remaining Life= 15 Year-7 year=8 year
Revised Annual Depreciation Expense= ( Book Value on 01 Jan 2016 - Residula Value)/ Remaining Useful Life
($190000-10000)/8 year=$52650=$22500