You are analyzing a company’s depreciation estimates because you are concerned that they are managing their...

You are analyzing a company’s depreciation estimates because you are concerned that they are managing their earnings. For example, they purchased an asset for $600,000 with a 15 year estimated life and $90,000 estimated salvage value. If depreciated straight line, what would be the effect on earnings if the company:

Increased the estimated salvage value
Decreased the estimated salvage value
Increased the estimated useful life
Decreased the estimated useful life

Solutions

Expert Solution

If depreciated straight line, what would be the effect on earnings if the company:

1. Increased the estimated salvage value

Depreciation expense will decrease as a result earnings will increase.

When estimated salvage value is Increased, then the depreciable cost decreases.

2. Decreased the estimated salvage value

Depreciation expense will increase as a result earnings will decrease.

When estimated salvage value is decreased, then the depreciable cost increases.

3. Increased the estimated useful life

Depreciation expense will decrease as a result earnings will increase.

When estimated useful life is increased then the same depreciable cost is spread over a larger no. of periods.

4. Decreased the estimated useful life

Depreciation expense will increase as a result earnings will decrease.

When estimated useful life is decreased then the same depreciable cost is spread over a lesser no. of periods.

ekkarill92 answered 1 year ago

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