Question

Q1.. YooHoo Co bought a significant item of plant for $240,000 in January 20X0. At the acquisition date management set the useful economic life at 6 years. In 20X1, it is decided that a life of 4 years would have been more appropriate. How should YooHoo Co treat this?

This is a change of accounting policy and should be adjusted prospectively. Do not change prior year. In 20X1 and going forward take the carrying amount of $200,000 and depreciate over the remaining useful life of 3 years

This is a change of accounting policy and should be adjusted retrospectively - restate prior year to show a depreciation charge of $60,000 rather than $40,000. The depreciation charge in 20X1 and going forward will also be $60,000

This is a change of accounting estimate and should be adjusted prospectively. Do not change prior year. In 20X1 and going forward take the carrying amount of $200,000 and depreciate over the remaining useful life of 3 years

This is a change of accounting estimate and should be adjusted retrospectively - restate prior year to show a depreciation charge of $60,000 rather than $40,000. The depreciation charge in 20X1 and going forward will also be $60,000

Answer 1

In January 20x0 the machinery is bought at $ 240000 and estimated to have useful life of 6 years then after 1 year i.e in 20x0 the estimate useful life is changed for 4 years.

In the cases where the estimate of management with respect to certain items including the badedbts depreciation method, rate or salvage value or estimated useful life is treated as changes in accounting estimate and not change in accounting policies.

Accounting policies are changed when the standard required or a better presentation will be there.

Changes in accounting estimate are made prospectively whereas changes in accounting policies are done retrospectively.

Here the change in the useful life of assets is change in accounting estimate so changes should be made prospectively.

Further the original useful life was 6 years thus on straight line depreciation method the depreciation for 20x0 will be $40000 ( 240000/6).

And the remaining balance to be depreciable after change in estimate will be $200000 for 3 years.

Thus the correct option is -----C i.e This is a change of accounting estimate and should be adjusted prospectively. Do not change prior year. In 20X1 and going forward take the carrying amount of $200,000 and depreciate over the remaining useful life of 3 years.