Question

Assume you are the accountant for a small business. Consider the following situation. On January 2, 2017, the business purchased a large piece of equipment for $500,000. At that time, you used straight line depreciation, with no salvage value to depreciate the equipment over 10 years. It is now January 2, 2020 and you realize that your estimate on the useful life was inaccurate. You now estimate that the equipment will only be useful for 7 years from the date of acquisition. Write a message to the President, Janet Brown, describing how this change will affect the 2020 financial statements, both the income statement and balance sheet. Explain how you calculated the new depreciation expense and accumulated depreciation. Also, discuss how this change will affect prior years' financial statements. Remember your audience. Your message must be concise and completely free of spelling and grammatical errors. Refer to the textbook, Change in Estimates for Depreciation.

Answer 1

Answer

Change in Accounting estimate:

On January 2,2020 it came to know that the estimate on useful life was inaccurate.

When the earlier accounting estimates proves to be incorrect or new information results in more accurate assumptions ,then the organisation should record the improved estimated in a change in accounting estimate.

As estimate on useful life was inaccurate , it falls under the category of change in accounting estimate.

Estimate change occurs when there is a change in carrying value of assets or liabilities and these are accounted in a period of change.

Accounting estimate doesn't require restatement of previous year financial statements.Hence the change doesn't affect prior year's financial statements.

On january 2, 2020 the accumulated depreciation = $ 150000($50000*3)

with the revised useful life , depreciation per year from the date of acquisition = $71429($500000/7)

Hence as per the revised useful life accumulated depreciation = $214287($71429*3)

Therefore additional depreciation is required to charge in this year = $64287 which affects current year income statement and affects current year income.

simultaneously Asset balance would come down by $64287.