Question

Irwin, Inc. constructed a machine at a total cost of $68 million. Construction was completed at the end of 2017, and the machine was placed in service at the beginning of 2018. 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 $2 million. At the beginning of 2021, Irwin decided to change to the straight-line method. Ignoring income taxes, prepare the journal entry relating to the machine for 2021.

Answer 1

Prepare the journal entry for 2021 after changing to the straight-line depreciation method, Irwin, Inc. must calculate the book value at the beginning of 2021 and determine the new annual depreciation by dividing the remaining book value by the remaining useful life.

Step-by-step explanation:

When changing from the sum-of-the-years’-digits method to the straight-line depreciation method, Irwin, Inc. needs to calculate the new annual depreciation expense starting from the year 2021. The total depreciated amount needs to be accounted for along with the remaining useful life of the asset.

The machine originally cost $68 million with a residual value of $2 million and a 10-year life. By 2021, three years of depreciation have already been charged using the sum-of-the-years’-digits method. To determine the new annual depreciation for 2021 onwards, the book value at the beginning of 2021 should be calculated first (the initial cost minus accumulated depreciation), then the remaining value (book value minus residual value) should be divided by the remaining useful life of the asset.

Note that specific numbers cannot be provided because the accumulated depreciation from 2018 to 2020 under the sum-of-the-years’-digits method isn't given in the question. Once the depreciation expense for 2021 is calculated, the journal entry would typically debit Depreciation Expense and credit Accumulated Depreciation for that amount.