Changes in Depreciation Estimates and Capitalization of Expenditures
Response to the following problem:
Ironic Metal Products, Inc., acquired a machine on January 2, 2007, for $76,600. The useful life of the machine was estimated to be eight years with a salvage value of $4,600. Depreciation is recorded on December 31 of each year using the sum-of-the-years'-digits method.
At the beginning of 2009, the company estimated the remaining useful life of the machine to be four years and changed the estimated salvage value from $4,600 to $2,600. On January 2, 2010, major repairs on the machine cost the company $34,000. The repairs added two years to the machine's useful life and increased the salvage value to $3,000.
Required:
1. Prepare journal entries to record:
a. The purchase of the machine.
b. Annual depreciation expense for the years 2007 and 2008.
c. Depreciation in 2009 under the revised estimates of useful life and salvage value.
d. The expenditure for major repairs in 2010.
e. Depreciation expense for 2010.
2. Compute the book value of the machine at the end of 2010.