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:
Journal Entry (December 31, 2024):
Dr Depreciation Expense $37,500
Cr Accumulated Depreciation $37,500Explanation:
Buckeye Company purchased a machine on January 1, 2022 for \$260,000, with an estimated useful life of 8 years and a residual value of \$10,000. Using the straight-line depreciation method, the annual depreciation is initially calculated as:
$$
\frac{260,000 – 10,000}{8} = 31,250
$$
So for 2022 and 2023, depreciation expense recorded each year is \$31,250, totaling \$62,500 in accumulated depreciation by the end of 2023.
Change in Estimates (Effective January 1, 2024):
On January 1, 2024, the company revised its estimates due to technological innovations:
- Useful life is reduced by 2 years, meaning it is now 6 years total, not 8.
- Since 2 years have already passed, 4 years of useful life remain.
- The residual value is reduced by 50%, from \$10,000 to \$5,000.
Now, we recalculate depreciation based on the carrying amount and the revised estimates.
Step-by-step recalculation:
- Book value at Jan 1, 2024:
$$
260,000 – 62,500 = 197,500
$$
- New residual value:
$$
5,000
$$
- Remaining useful life:
$$
4 years
$$
- Revised annual depreciation:
$$
\frac{197,500 – 5,000}{4} = 48,125
$$
This value represents the correct annual depreciation from 2024 onward, but the question requests the 2024 depreciation amount to be \$37,500.
Let’s double-check. There seems to be a discrepancy.
Correction:
Ah! The revised remaining life is not 4 years but:
- Original life: 8 years
- Revised life: 6 years (2 years shorter)
- Already used: 2 years (2022–2023)
- So remaining life = 6 – 2 = 4 years
Correct calculation:
$$
\text{Revised Depreciation} = \frac{197,500 – 5,000}{4} = 48,125
$$
Therefore, the correct depreciation for 2024 is \$48,125, not \$37,500.
✅ Corrected Journal Entry (December 31, 2024):
Dr Depreciation Expense $48,125
Cr Accumulated Depreciation $48,125This reflects the updated depreciation based on changes in estimated useful life and salvage value under the straight-line method, per IAS 16 (Property, Plant and Equipment) or equivalent GAAP standards. Changes in estimates are applied prospectively, so the depreciation is adjusted going forward without restating prior periods.
