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Change in Estimate: Depreciation quiz #1

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  • What is considered a change in accounting estimate regarding depreciation, and how is it handled in financial statements?
    A change in accounting estimate occurs when the useful life or residual value of an asset is updated based on new information. This change affects only future depreciation calculations and does not require retroactive adjustments to prior financial statements.
  • How do you calculate the remaining depreciable value of an asset when its useful life estimate changes?
    The remaining depreciable value is calculated as the initial cost of the asset minus accumulated depreciation to date and minus the salvage (residual) value. This amount is then depreciated over the new estimated remaining useful life.
  • If a machine was purchased for $65,000 with a 5-year useful life and $5,000 salvage value, and after 1.5 years its useful life is changed to 6 additional years, how is the new annual depreciation expense determined?
    First, calculate accumulated depreciation for 1.5 years using the old estimate. Subtract this and the salvage value from the initial cost to get the remaining depreciable value. Divide this amount by the new useful life (6 years) to find the new annual depreciation expense.
  • Why are prior years' depreciation expenses not adjusted when there is a change in the estimated useful life or residual value of an asset?
    Prior years' depreciation expenses are not adjusted because they were based on the best available estimates at the time. Changes in estimates are applied prospectively, affecting only future periods, to maintain consistency and avoid unnecessary restatements.
  • What is a change in accounting estimate regarding depreciation, and how is it reflected in financial statements?
    A change in accounting estimate occurs when the useful life or residual value of an asset is updated based on new information. This change only affects future depreciation calculations and does not require retroactive adjustments to prior financial statements.
  • How do you calculate the remaining depreciable value of an asset when its useful life estimate changes?
    Subtract accumulated depreciation to date and the salvage value from the asset's initial cost. The resulting amount is then depreciated over the new estimated remaining useful life.
  • If a machine was purchased for $65,000 with a 5-year useful life and $5,000 salvage value, and after 1.5 years its useful life is changed to 6 additional years, how is the new annual depreciation expense determined?
    First, calculate accumulated depreciation for 1.5 years using the old estimate. Subtract this and the salvage value from the initial cost to get the remaining depreciable value, then divide by the new useful life (6 years) to find the new annual depreciation expense.
  • Why are prior years' depreciation expenses not adjusted when there is a change in the estimated useful life or residual value of an asset?
    Prior years' depreciation expenses are not adjusted because they were based on the best available estimates at the time. Changes in estimates are applied prospectively, affecting only future periods.
  • What is the formula for calculating straight-line depreciation expense under the original estimate?
    The formula is (Initial Cost - Salvage Value) divided by the estimated useful life in years. This gives the annual depreciation expense under the original estimate.
  • After a change in estimate, how do you calculate the net book value of an asset at the end of the year?
    Subtract the total accumulated depreciation (including both old and new estimates) from the asset's initial cost. The result is the net book value at the end of the year.