Question

Memo Assignment

Chapter 10 Plant Assets

Change in Estimate

You are the accountant for a small business. On January 2, 2014, the business purchased a large piece of equipment for $1,000,000. At that time, you used straight line depreciation, with no salvage value to depreciate the equipment over 15 years. It is now January 2, 2018 and you realize that your estimate on the useful life was inaccurate. You now estimate that the equipment will only be useful for 10 years from the date of acquisition.

Write a memo to the President, Janet Brown, describing how this change will affect the 2018 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 memo must be concise. It must be completely free of spelling and grammatical errors. Refer to the textbook, Change in Estimates for Depreciation.

Here is a quote for you to keep in mind while writing in this class.

“The most valuable of all talents is that of never using two words when one will do.”
― Thomas Jefferson

Answer 1

Office Memo :

To Janet Brown

President , Date Jan 2,2018

Sub : Revision in Useful Life and Annual Depreciation of Equipment from Jan 2018.

Dear Madam,

This Memo is being raised to inform you about a change required to be made in the useful life and depreciation calculation of the $1M Equipment we purchased on Jan 2,2014. We have initially estimated its useful life as 15 years and have taken the depreciation expense for 4 years. However, now, based on a review of its performance  we have understood that the useful life of the equipment needs to be revised to 10 years. Accordingly we can claim the depreciation for another 6 years. However, as per Accounting statndard guidelines, we need not do any retrospective change in the accouting records. We need to apply the revised depreciation expense from the current year only. I am attaching a table with the detailed calculation of the revised depreciation expense we need to claim from Jan 2,2018. The Annual depreciation expense will increase from $66,667 to $ 122,222.

Kindly have a look at the details and provide your approval for using the revised depreciation expense and useful life  which will reflect the usage expense of the equipment more accurately.

RegaRDS,

XYZ

Accountant

Attahment :

Working :

Revised Depreication Caluclation
Particulars	Amt $
Acquisition cost of Equipment Jan 2,2014	1,000,000
Salvage Value	-
Depreciable Value	1,000,000
Estimated Useful life in years	15
Annual Depreciation by SL Method	66,667
Total Depreciation Accumulated from 2014 to 2017 (4Years)	266,667
Remaining Depreciable Asset Value on Jan 2,2018	733,333
Revised Useful Life in years	10
Remaining Useful Life in years as on Jan 2,2018	6
Revised Annual Depreciation from Jan 2,2018	122,222