Buckeye Company purchased a machine on January 1, 2022. The machine had a cost of $260,000 with a $10,000 residual value. The estimated useful life of the machine was eight years. On January 1, 2024, due to technological innovations, the estimated useful life was reduced by two years from the original life and the residual value was reduced by 50%. The company uses straight-line depreciation. Required: Prepare the journal entry to record the annual depreciation on December 31, 2024. (5 pts)
The Correct Answer and Explanation is:
Correct Answer:
Step 1: Calculate depreciation for 2022 and 2023 using original estimates.
- Cost: $260,000
- Residual value: $10,000
- Useful life: 8 years
- Depreciation per year (original): 260,000−10,0008=250,0008=31,250\frac{260,000 – 10,000}{8} = \frac{250,000}{8} = 31,2508260,000−10,000=8250,000=31,250
Depreciation recorded for 2022 and 2023: 31,250×2=62,50031,250 \times 2 = 62,50031,250×2=62,500
Book value at Jan 1, 2024: 260,000−62,500=197,500260,000 – 62,500 = 197,500260,000−62,500=197,500
Step 2: Adjust estimates on January 1, 2024
- New remaining useful life:
Originally 8 years → shortened by 2 years → now 6 years total
2 years used already, so 4 years remaining - New residual value:
$10,000 × 50% = $5,000 - New depreciation: 197,500−5,0004=192,5004=48,125\frac{197,500 – 5,000}{4} = \frac{192,500}{4} = 48,1254197,500−5,000=4192,500=48,125
Journal Entry for Depreciation on December 31, 2024:
plaintextCopyEditDate: December 31, 2024
Dr. Depreciation Expense 48,125
Cr. Accumulated Depreciation 48,125
Depreciation is the process of allocating the cost of a tangible asset over its useful life. It ensures that the expense of using the asset is matched to the revenues it helps generate in each accounting period. Buckeye Company uses the straight-line method, which spreads the depreciation expense evenly over the asset’s useful life.
Initially, the machine cost $260,000 and had a residual value of $10,000, indicating the company expected to recover $10,000 at the end of its 8-year life. The straight-line depreciation calculation was: Cost−Residual ValueUseful Life=260,000−10,0008=31,250 per year\frac{\text{Cost} – \text{Residual Value}}{\text{Useful Life}} = \frac{260,000 – 10,000}{8} = 31,250 \text{ per year}Useful LifeCost−Residual Value=8260,000−10,000=31,250 per year
By the beginning of 2024, the company had already recorded two years of depreciation (2022 and 2023), totaling $62,500. This means the machine’s book value was now: 260,000−62,500=197,500260,000 – 62,500 = 197,500260,000−62,500=197,500
Due to technological advancements, the machine’s useful life was shortened by 2 years (from 8 to 6 years total), and the residual value was reduced by 50% (from $10,000 to $5,000). With 2 years already used, 4 years of useful life remain.
The new depreciation expense is based on the revised book value and estimates: 197,500−5,0004=48,125 per year\frac{197,500 – 5,000}{4} = 48,125 \text{ per year}4197,500−5,000=48,125 per year
The company must record this new depreciation amount starting in 2024. This requires a journal entry that increases (debits) Depreciation Expense and increases (credits) Accumulated Depreciation for $48,125 on December 31, 2024.
This entry ensures compliance with Generally Accepted Accounting Principles (GAAP) by recognizing changes in estimates and properly matching expenses with the current and future benefits of the asset.
