CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingMedium
A publicly traded company, Global Corp., prepares its financial statements in accordance with U.S. GAAP. During Year 1, Global Corp. purchased a machine for $1,000,000. It has an estimated useful life of 10 years and a salvage value of $100,000. Global Corp. uses the straight-line method of depreciation. In Year 2, Global Corp. revised the estimated useful life of the machine to 8 years remaining and its salvage value to $50,000. What amount should Global Corp. report as depreciation expense for the machine for the year ended December 31, Year 2?
- A$100,000
- B$112,500
- C$80,000
- D$90,000
Show answer & explanationAnswer & explanation
Correct answer: B. $112,500
This is a change in accounting estimate, which is accounted for prospectively. First, calculate the book value at the end of Year 1. Then, re-calculate depreciation using the revised remaining useful life and salvage value.
Why the other options are wrong
- A. This is the original annual depreciation expense without considering the change in estimate.
- C. This would be the original depreciation if the salvage value was $200,000.
- D. This would be the original depreciation expense with the original estimates.
Change in Accounting Estimate
A change in accounting estimate is an adjustment to the carrying amount of an asset or liability, or to the amount of the periodic consumption of an asset, resulting from the reassessment of the expected future benefits and obligations associated with assets and liabilities.
- Accounted for prospectively (in current and future periods).
- Does not require restatement of prior financial statements.
- Common examples include changes in useful lives, salvage values, or bad debt estimates.
Memory trick: Estimates are 'EASY' to change, just adjust 'EXPECTED' future periods.