Question

Continuing from Question 2... Scenario B: Desert, Co. purchased a truck for 550.000 on January 1, 2016. The truck had an estimated salvage value of $5.000 and an estimated useful life of 10 years, Desert uses the straight-line depreciation method On January 1, 2019. Desert revised the estimated salvage value to S10,000, but did not change the useful life. The accountant recorded depreciation expense using the old salvage value when calculating the $500.000 ICO. 1. Is an adjustment needed to Desert's Income for Continuing Operations for 2019? Yes 1A. If yes, what type of adjustment? Prospective 1B. If yes, what is that amount of the adjustment needed? Decrease ICO 52650 Answer 1: Yes Answer 2: Prospective Answer 3: Decrease ICO 82650

one of the three is wrong

Answer 1

Revision of salvage value and estimated useful life : If there is a change in the estimate of salvage value or estimated useful life then the effect of such revision in estimates is be considered prospectively i.e. the change in depreciation Expense is be recoded in the year in which depreciation changes and subsequent accounting periods Revised Deprecation Expense = (Cost - Revised Salvage Value - Accumulated Depreciation)/ Revised Remaining Useful life Yes, adjustment is needed The adjustment will be prospective Increase the ICO by $714 (See working below] Ans 1 Ans 2 Ans 3 Step 1 Straight Line Depreciation = (Cost - salvage value)/useful life Straight Line Depreciation = ($50000-$5000)/10 Straight Line Depreciation = $4500 Step 2 Cost Less: Depreciation for 2016 Less: Depreciation for 2017 Less: Depreciation for 2018 Book Value as on 31st Dec 2018 $50,000 ($4,500) ($4,500) ($4,500) $36,500 Step 3 Book Value as on 31st Dec 2018 Less: Revised Salvage Value Remaining Cost be depreciated Year of life remaining (10-3] Depreciation for 2019 ($26500/7] $36,500 ($10,000) $26,500 $3,786 Step 4 Depreciation based on old salvage value for 2019 Less: Revised Depreciation for 2019 Adjustment amount $4,500 ($3,786) $714 Increase the ICO by $714