Question

The useful life of an asset is estimated differently from one company to the next. This can greatly effect financial statements as you can see in the example below.

Nuware RP Stuart

Fixed Assets: $678,993 $430,256

Depr Exp: $ 36,356 $ 26,900

Est Useful Life: 18.68 15.99

Estimating a longer useful life of assets lowers depreciation expense, therefore raising net income and total assets. In looking at accumulated depreciation, we can figure how long fixed assets have been on the books:

Nuware RP Stuart

Fixed Assets: $678,993 $430,256

Accum Depr: $304,500 $135,692

Years owned: 8.41yrs 5.12yrs

How does the “difference” in average age of Nuware’s and RP Stuart’s fixed assets impact Nuware’s pre-tax reported income in 2013 and its 2013 balance sheet?

Answer 1

Let us do the comparison looking at the following data

	Nuware	RP Stuart
Fixed Assets	$   678,993	$   430,256
Est Useful Life (in years)	18.68	15.99
Depr expense year	$     36,356	$     26,900

Depreciation expense for Nuware is higher than that of RP Stuart. It would result in reduction of pre tax reported income by the same amount.

The impact on pre tax income of Nuware would be $ 36,356 and for RP Stuart would be $ 26,900

On the balance sheet, the accumulated depreciation would increase by the amount of deprecation expense. This would lead to reduction in Net Assets reported on the balance sheet.