Question

Machinery purchased for $63,000 by Concord Co. in 2016 was originally estimated to have a life of 8 years with a salvage value of $4,200 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2021, it is determined that the total estimated life should be 10 years with a salvage value of $4,725 at the end of that time. Assume straight-line depreciation.

Required:
1. Prepare the entry to correct the prior years' depreciation, if necessary.
2. Prepare the entry to record depreciation for 2021.

Answer 1

A change in depreciation estimates does not require correcting previous years' depreciation, it's handled prospectively. Consequently, no entry is necessary to adjust prior depreciation. For 2021, the new depreciation expense based on the updated life and salvage value is $5,827.50.

Step-by-step explanation:

Correcting Prior Years' DepreciationOriginally, the machinery was depreciated over 8 years with a salvage value of $4,200, resulting in an annual depreciation expense of $7,350 (($63,000 - $4,200) / 8). Over 5 years, the total depreciation would have been $36,750. However, now that the estimated life is 10 years with a new salvage value of $4,725, the revised annual depreciation is $5,827.50 (($63,000 - $4,725) / 10).

Entry to Correct Prior Years' Depreciation

No adjusting entry is required to correct prior years' depreciation because the change in estimate is accounted for prospectively; thus, prior years' financial statements are not retrospectively adjusted.

Recording Depreciation for 2021

For 2021, the depreciation expense to be recorded is $5,827.50, reflecting the new estimate. The journal entry would be:

Debit Depreciation Expense: $5,827.50

Credit Accumulated Depreciation—Machinery: $5,827.50