(Supplement) Computing the Effect of a Change in Useful Life and Residual Value on Financial Statements and Cash Flows (Straight-Line Depreciation)
Burbank 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 | $330,000 |
Accumulated depreciation (based on straight-line depreciation, an estimated life of 50 years, and a $30,000 residual value) | 78,000 |
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 $30,000). 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?
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