Chapter 9: 21 E (page 488)

Changing an asset’s useful life and residual value Salem Hardware Consultants purchased a building for $540,000 and depreciated it on a straight-line basis over a 40-year period. The estimated residual value is $100,000.
After using the building for 15 years, Salem realized that wear and tear on the building would wear it out before 40 years and that the estimated residual value should be $88,000.
Starting with the 16th year, Salem began depreciating the building over a revised total life of 35 years using the new residual value. Journalize depreciation expense on the building for years 15 and 16.

Short Answer

Expert verified

Revised Depreciation is $8,200.

Step by step solution

Meaning of Depreciation

The expenses charged for the purpose of reporting the decline in the value of the fixed assets acquired by the company are known as depreciation expenses. Such expenses are reported in the statement reporting net income.

Calculating Revised Depreciation in the books of Salem Hardware Consultants

$\begin{matrix} R e v i s e d D e p r e c i a t i o n = \frac{B o o k v a l u e - R e v i s e d r e s i d u a l v a l u e}{R e v i s e d r e s i d u a l u s e f u l l i f e} \\ = \frac{$ 375, 000 - $ 88, 000}{35} \\ = $ 8, 200 \end{matrix}$

Working note: Calculation of book value at beginning of 16^th year:

$\begin{matrix} B o o k v a l u e a t b e g i n n i n g o f 16 t h y e a r = C o s t - (\frac{C o s t - R e s i d u a l v a l u e}{U s e f u l l i f e} \times 15) \\ = $ 540, 000 - (\frac{$ 540, 000 - $ 100, 000}{40} \times 15) \\ = $ 540, 000 - $ 165, 000 \\ = $ 375, 000 \end{matrix}$

Journalize Depreciation Expenses in the book of Salem Hardware Consultants

Date	Particulars	Debit $	Credit $
31^st Dec 2015	Depreciation Expenses Revised	8,200
	Accumulation Depreciation		8,200
	(To Depreciation expenses are revised)

31^st Dec 2016	Depreciation Expenses	8,200
	Accumulated Depreciation		8,200
	(To depreciation expenses are revised for next year)

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Short Answer

Step by step solution

Meaning of Depreciation

Calculating Revised Depreciation in the books of Salem Hardware Consultants

Journalize Depreciation Expenses in the book of Salem Hardware Consultants

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