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On July 1, 2017, Sport Company purchased for $3,600,000 snow-making equipment having an estimated useful life...

On July 1, 2017, Sport Company purchased for $3,600,000 snow-making equipment having an estimated useful life of 5 years with an estimated salvage value of $150,000. Depreciation is taken for the portion of the year the asset is used.

Assume the company had used straight-line depreciation during 2017 and 2018. During 2019, the company determined that the equipment would be useful to the company for only one more year beyond 2019. Salvage value is estimated at $200,000

Compute the amount of depreciation expense for the 2019 income statement.  

My question is, when calculating the new depreciation for the year with the change in estimate in 2019, do I take into account that only part of the year is depreciated the first year ? Or in other words, from the problem above, do I put 4.5 as the remaining useful life for the new annual depreciation ? (since 2017 was partially depreciated, and 2018 was fully depreciated, so that is 1.5 years worth of depreciation already, and the new estimate added one more year of useful life). What is the remaining useful life after the estimate and why ?

Solutions

Expert Solution

Change in useful life of assets and residual value is considered as a change in naccounting estimates, both in IFRS and US GAAP. For change in accounting estimates, the respective standards require the impact of change to be applied on a prospective basis. The application of this is outlined in following steps:

- Consider the book value of the asset as on date of change

- Re-compute the estimated depreiable amount as on the date of change

- Take revised estimate of useful life as on date of change

- Calculated depreciation based on above 2 amounts.

IN the given case, application will be as follows:

Book value as on 31 Dec 2019 (before 2019 depreciation) will be USD 2.565 mn (calculated as below)

Revised salvage value is 200,000. Therefore, the depreciable amount is (2,565,000-200,000=2,365,000)

Now. the asset is expected to be used only for 1 year beyond 2019, i.e. the asset needs to be depreciated by 2020, i.e. including 2019, we have 2 years to write down the aset to salvage value. Therefore, remaining useful life (before 2019 depreciation) is 2 years. Therefore, the depreciable value of USD 2,365,000 will be split equally over 2019 and 2020. Depreciation in 2019 will therefore be (2,365,000/2=1,182,500). Assuming there are no further changes in estimates, the same amount will appear as depreciation in 2020.

Please comment in case any part of the solution is not clear, happy to help.

ekkarill92 answered 1 year ago
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