3.9 Change in Accounting Estimate - Depreciation Method

Change in Accounting Estimate: Depreciation Method

Scenario

  • ABC Company purchased equipment on January 1, Year 1 for 50,00050,000.
  • Useful life: 5 years.
  • Salvage value: 3,0003,000.
  • Depreciation method: Double Declining Balance.
  • In Year 3, ABC decides to change to the Straight Line method.
  • No change in salvage value.

Objective

  • Determine the proper accounting treatment when changing the depreciation method (a change in accounting estimate).
  • Find the book value as of January 1, Year 3.
  • Report depreciation expense for Year 3 using the straight-line method.

Step 1: Find Book Value as of January 1, Year 3

Year 1: Double Declining Balance Method
  • Formula: 2/Useful Life∗(Original Cost−Accumulated Depreciation)2 / \text{Useful Life} * (\text{Original Cost} - \text{Accumulated Depreciation})
  • Calculation: (2/5)∗((2 / 5) * (50,000 - 0)0)
  • Depreciation Expense (Year 1): 20,00020,000
Year 2: Double Declining Balance Method
  • Formula: 2/Useful Life∗(Cost−Accumulated Depreciation)2 / \text{Useful Life} * (\text{Cost} - \text{Accumulated Depreciation})
  • Accumulated Depreciation: 20,00020,000
  • Calculation: (2/5)∗((2 / 5) * (50,000 - 20,000)=0.4∗20,000) = 0.4 *30,000</li><li>DepreciationExpense(Year2):</li> <li>Depreciation Expense (Year 2):12,000</li></ul><h5id="totalaccumulateddepreciationyear1andyear2">TotalAccumulatedDepreciation(Year1andYear2)</h5><ul><li></li> </ul> <h5 id="totalaccumulateddepreciationyear1andyear2">Total Accumulated Depreciation (Year 1 and Year 2)</h5> <ul> <li>20,000 + 12,000=12,000 =32,000</li></ul><h5id="bookvalueasofjanuary1year3">BookValueasofJanuary1,Year3</h5><ul><li>OriginalCost:</li> </ul> <h5 id="bookvalueasofjanuary1year3">Book Value as of January 1, Year 3</h5> <ul> <li>Original Cost:50,000</li><li>AccumulatedDepreciation:</li> <li>Accumulated Depreciation:32,000</li><li>BookValue:</li> <li>Book Value:50,000 - 32,000=32,000 =18,000</li></ul><h4id="step2restructuredepreciationusingstraightlinemethod">Step2:RestructureDepreciationusingStraightLineMethod</h4><h5id="straightlinemethodformula">StraightLineMethodFormula</h5><ul><li></li> </ul> <h4 id="step2restructuredepreciationusingstraightlinemethod">Step 2: Restructure Depreciation using Straight Line Method</h4> <h5 id="straightlinemethodformula">Straight Line Method Formula</h5> <ul> <li>(\text{Book Value} - \text{Salvage Value}) / \text{Remaining Useful Life}</li></ul><h5id="parameters">Parameters</h5><ul><li>BookValueasofJanuary1,Year3:</li> </ul> <h5 id="parameters">Parameters</h5> <ul> <li>Book Value as of January 1, Year 3:18,000</li><li>SalvageValue:</li> <li>Salvage Value:3,000</li><li>RemainingUsefulLife:<ul><li>TotalUsefulLife:5years</li><li>YearsAlreadyDepreciated:2years</li><li>RemainingUsefulLife:3years</li></ul></li></ul><h5id="calculation">Calculation</h5><ul><li>DepreciableBase:</li> <li>Remaining Useful Life:<ul> <li>Total Useful Life: 5 years</li> <li>Years Already Depreciated: 2 years</li> <li>Remaining Useful Life: 3 years</li></ul></li> </ul> <h5 id="calculation">Calculation</h5> <ul> <li>Depreciable Base:18,000 - 3,000=3,000 =15,000</li><li>AnnualDepreciationExpense:</li> <li>Annual Depreciation Expense:15,000 / 3 = 5,0005,000

Conclusion

  • Record 5,0005,000 depreciation expense per year for the current year and the remaining two years of the asset's useful life.