Question

Yukelson Company owns the building occupied by its administrative office. The office building was reflected in the accounts at the end of last year as follows:

Cost when acquired	$	363,000
Accumulated depreciation (based on straight-line depreciation, an estimated life of 50 years, and a $33,000 residual value)		72,600

During January of this year, on the basis of a careful study, management decided that the total estimated useful life should be changed to 30 years (instead of 50) and the residual value reduced to $22,500 (from $33,000)). The depreciation method will not change.

Required:

1. Compute the annual depreciation expense prior to the change in estimates.

2. Compute the annual depreciation expense after the change in estimates.

3. What will be the net effect of changing estimates on the balance sheet, net income, and cash flows for the year?

Depreciation expense 2. Compute the annual depreciation expense after the change in estimates. Depreciation expense 3. What will be the net effect of changing estimates on the balance sheet, net income, and cash flows for the year? Decreasing the useful life and the residual value of the asset will total assets on the balance sheet, will net income on the income statement, and will total cash flows on the statement of cash flows for the year.

Answer 1

1)	Cost			$ 363,000.00
	Estimated Life			50	years
	Residual Value			$   33,000.00
	Annual Depreciation =			($ 363000 - $ 33000) / 50
			=	$     6,600.00

2)	WDV			$ 290,400.00	($ 363000 - $ 72600)
	Revised Residual Value			$   22,500.00
	Revised Estimated Life			19	years	(W.N)
	Annual Depreciation =			($ 290400 - $ 22500) / 19
			=	$14,100.00
	W.N
	Reduced Residual Value			30	years
	Years already elapsed			11	($ 72600 / $ 6600)
	Remaining Life			19

3)	a)	Decrease	total assets
	b)	Decrease	net income
	c)	No effect	on total cash flows