Uncle Joe bought an equipment for $24,000. Uncle Joe estimates a useful life of four years with a salvage value of $4,000. Suppose after 3 years of depreciation, Uncle Joe decides the useful life should have been 8 years.
Using our straight line formula, depreciation expense before the re-estimation is computed as follows:
(24,000 – 4,000) /4 = 5,000 depreciation
After 3 years, Uncle Joe would have taken 5,000 * 3 = 15,000 in depreciation
The book value is 8,000 (24,000 – 15,000) and there is 5 years left of depreciation based on the new estimation. The new depreciation amount is computed as follows:
(8,000 – 4,000)/5 = 4,000 /5 = 800
The revised amounts are determined for the full year regarded less of when the estimate is made. If Uncle Joe makes the estimate in September of 2014, the change goes into effect January of 2014.
End of lesson 9. Next is Lesson 10