Green Co has a machine with a total cost of 70 million and t

Green Co. has a machine with a total cost of $70 million, and the machine is placed in service at the beginning of 2018. The machine is depreciated using the the sum-of-the-years\'-digits method with 10-year useful life and $4 million in residual value. At the beginning of 202, Green decides to change to the straight-line method with 11-year useful life and $5.6 million in residual value.

Required: How much is the depreciation expense related to the machinein 2021? Please share the Calculation and Journal Entry recorded in 2021.

Solution

“ Depreciation Expense related to the machinery in 2021 = $4 Million “

Journal Entry to record Depreciation for 2021 Under Straight Line Method

Account Titles and Explanation

Debit

Credit

Depreciation Expenses A/c

$4 Million

To Accumulated Depreciation Expenses A/c

$4 Million

[Entry to record 2021 Depreciation Under New Straight Line Method ]

Workings

Firstly, Calculate the total depreciation up to the year ended 2020 under Sum of Years Digits Method

Depreciation Sum of Years Digits Method = [ Cost – Salvage Value ] x Year Fraction

Depreciation for Year 2018 = [ $70 Million - $4 Million ] x 10/55 = $12 Million

Depreciation for Year 2019 = [ $70 Million - $4 Million ] x 9/55 = $10.80 Million

Depreciation for Year 2020 = [ $70 Million - $4 Million ] x 8/55 = $9.60 Million

Total Depreciation Expenses charged

= $12 Million + $10.80 Million + $9.60 Million

= $32.40 Million

Book Value at the end of Year 2020 = Cost – Total Depreciation Charged

= $70 Million - $32.40 Million

= $37.60 Million

Depreciation Expense in Year 2021 Under New Straight Line Method

= [ Book Value – Revised Salvage Value ] / Remaining Useful Lie*

= [ $37.60 Million - $5.60 Million ] / 8 Years

= $4 Million per year