Question

At the beginning of 2019, Robotics Inc. acquired a manufacturing facility for $13.0 million. $10.0 million of the purchase price was allocated to the building. Depreciation for 2019 and 2020 was calculated using the straight-line method, a 20-year useful life, and a $2.0 million residual value. In 2021, the estimates of useful life and residual value were changed to 15 total years and $600,000, respectively. What is depreciation on the building for 2021?

Answer 1

When there is a change in the estimated useful life of the asset or the residual value of the asset it is considered as change in accounting estimate.

Changes in Accounting Estimates must be accounted for prospectively in the financial statements, i.e. the effects of the change must be incorporated in the accounting period in which the estimates are revised. Therefore, carrying amounts of assets and liabilities and any associated expense and gains are adjusted in the period of change in estimate.

First of all we need to compute the net book value at the end of Year 2020.

Particulars		Buildings
		$
Purchase Price	A	10,000,000
Estimated Salvage value	B	2,000,000
Value to be depreciated in its useful life	C=A-B	8,000,000
Useful Life of Asset (in Years)	D	20
Depreciation value per year as per SLM	E=C/D	400,000

Accumulated Depreciation for 2019 & 2020: $400,000 + $400,000 = $800,000.

Net Book Value at year-end 2020 = Gross Value - Accumulated depreciation

= $10,000,000 - $800,000 = $9,200,000

Now the estimated total life of asset has been changed to 15 years from which 2 years have elapsed and as per the new estimates, salvage value will only be $600,000.

Therefore, computation of depreciation from year 2021 will be as follows:

Particulars		Buildings
		$
Net Book Value	A	9,200,000
Estimated Salvage value	B	600,000
Value to be depreciated in its useful life	C=A-B	8,600,000
Useful Life of Asset (in Years)	D	13
Depreciation value per year as per SLM	E=C/D	661,538.46

Therefore, depreciation for the year 2021 = $661,538.46.