8Extra Practice(FA) What if? #1Co. purchased equipment for $710,000 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 2015, it is determined that the total estimated life should be 15 years with a salvage value of $4,000 at the end of that time.Instructions(c) Prepare the entry (if any) to correct the prior years’ depreciation.(d) Prepare the entry to record depreciation for 2015.Answer(FA) What if? #1a.No entry necessary. Changes in estimates are treated prospectively.b.Depreciation Expense........................................27,000*...........Accumulated Depreciation—Equipment27,000*Original cost$710,000Accumulated depreciation [($710,000 – $10,000) ÷ 10] X 7 (490,000)Book value (1/1/11) 220,000Estimated salvage value (4,000)Remaining depreciable basis 216,000Remaining useful life (15 years – 7 years)÷ 8Depreciation expense—2014$ 27,0008

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9(FA c) What if? #2Change in Depreciation methods (From Straight line to Sum of the Years’ digits)Cost of equipment is $710,000Estimated useful life is $ 10 yearsEstimated salvage value is $10,000At the beginning of Year 8 (i.e. after depreciating the equipment for 7 years), the company changes from straight line to the sum of the years’ digits method of depreciation There is no change made to the estimated salvage value or useful lifeInstructions:1.How should the change from straight line to sum of the years’ digits method be reported?2.Calculate depreciation expense for years 8, 9 and 109

10(FA) What if? #2Answer: 1.Account for the change in depreciation methodsprospectively2.Book value, beg year 8 (using straight line)Cost – AD710,000-(70000*7)710000-490,000=220000Estimated salvage value (no change 10,000Depreciable cost: BV –Est SV = 220,000-10,000=210,000Application of Sum of the years digits10 years – 7 years = 3 years of depreciationSOYD: 3+2+1 = 6 = denominatorYearly depreciation: Year 8-10 under sum of years’ digitsYear 8 (220,000-10,000) (3/6)105,000Year 9(220,000-10,000) (2/6)70,000Year 10(220,000-10,000) (1/6)35,00010

11Ch 22 Part 2Error Corrections