Bailand Company purchased a building for $286,000 that had an estimated residual value of $6,000 and an estimated service life of 10 years. Bailand purchased the building 4 years ago and has used straight-line depreciation. At the beginning of the fifth year (before it records depreciation expense for the year), the following independent situations occur: 1. Bailand estimates that the asset has 8 years’ life remaining (for a total of 12 years).
2. Bailand changes to the sum-of-the-years’-digits method.
3. Bailand discovers that the estimated residual value has been ignored in the computation of depreciation expense.
Required: For each of the independent situations, prepare all the journal entries relating to the building for the fifth year. Ignore income taxes.

Bailand Company

Journal Entries:

1. Re-estimated useful life to 8 years (12 in total):

Debit Depreciation Expense $21,000

Credit Accumulated Depreciation $21,000

To record depreciation expense for the year.

2. Sum of the digit method:

Debit Depreciation Expense $37,333

Credit Accumulated Depreciation $37,333

To record depreciation expense for the year.

3. Bailand discovers that the estimated residual value had been ignored:

Debit Depreciation Expense $27,600

Credit Accumulated Depreciation $27,600

To record depreciation expense for the year.

Explanation:

A) Calculations:

Building $286,000

Residual value  = $6,000

Depreciable amount = $280,000 ($286,000 = 6,000)

Straight-line Depreciation per year = $28,000 ($280,000/10)

Accumulated Depreciation after 4 years = $112,000 ($28,000 x 4)

Book value after 4 years = $174,000

Independent situations:

1. Bailand estimates that the asset has 8 years’ life remaining (for a total of 12 years).

Book Value  = $174,000

Residual value = $6,000

Depreciable amount = $168,000

Remaining Lifespan = 8 years

Depreciation expense each year = $21,000

2. Bailand changes to the sum-of-the-years’-digits method.

8/36 x $168,000 = $37,333 for fifth year.

7/36 x $168,000 for the sixth year

6/36 x $168,000 for the seventh year, and so forth

B) The Sum-of-the-years'-digits (SYD) is an accelerated method for calculating an asset's depreciation.   For each year, there is a digit reflecting the number of years remaining.  This digit is then divided by this sum of the years to determine the percentage by which the asset should be depreciated each year, starting with the highest number in the first year of application.

3. Bailand discovers that the estimated residual value has been ignored in the computation of depreciation expense.

Determination of annual depreciation expenses:

Depreciable amount = $286,000

Depreciation expense per year = $28,600 ($286,000/10)

After four years, Accumulated Depreciation = $114,400 ($28,600 x4)

Book Value = $171,600 ($286,000 - 114,000)

less salvage value $6,000

Depreciable amount = $165,600

Depreciation expense each year = $27,600 ($165,600 / 6)

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