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Green Co
Green Co. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2014 and the machine was placed in service at the beginning of 2015. The machine was being depreciated over a 10-year life using the sum-of-the-years'-digits method. The residual value is expected to be $4 million. At the beginning of 2018, Green decided to change to the straight-line method.
Required:
1. Ignoring income taxes, what journal entry(s) should Green record relating to the machine for 2018?
2. Suppose Green has been using the straight-line method and switches to the sum-of-the-years'-digits method. Ignoring income taxes, what journal entry(s) should Green record relating to the machine for 2018?
Expert Solution
Workings:
1) Depreciation Amount = Cost - Salvage Value = $70 millions - $4 millions = $66 millions
Depreciation already charged under the sum-of-the-digits method = ( 10 + 9 + 8) / 55 * $66 millions = $ 32.40 millions
Book Value at the Beginning of 2018 = $70 millions - $32.40 millions = $37.60 millions
Annual Depreciation using Straight Line Method:
Annual Depreciation = (Book Value at the Beginning of 2018- Salvage Value)/Remaining Estimated Life
= ($37.60 millions - $4 millions)/7
= $33.60 millions / 7
Annual Depreciation = $4.80 millions
So, Annual Depreciation for the remaining 7 years of the asset's life is $4.80 millions.
2) Annual Depreciation = (Cost - Salvage Value)/Remaining Estimated Life
= ($70 millions - $4 millions)/10
= $66 millions / 10
Annual Depreciation = $6.6 millions
Accumulated depreciation after three years using straight line method = $6.6*3 = $19.80 millions
Book Value at the Beginning of 2018 = $70 millions - $19.80 millions = $50.20 millions
2018 Depreciation Expense under Sum of the Years Digits Method = ($50.20 millions - $4 millions) / 28 * 7 = $11.55 million.
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