Page 112 - Demo

Ch(5): Plant Assets Disposal109Change in Estimates for DepreciationDepreciationis based on estimates of salvage value and useful life. During the useful life of an asset, new information may indicatethatthese estimates are inaccurate. If our estimate of anasset%u2019s useful life and/or salvage value changes, what should we do? The answer is to use the new estimate to compute depreciation for current and future periods. This means that we revise the depreciation expense computation by spreading the cost yet to be depreciated over the remaining useful life. This approach is used for all depreciation methods.Illustrate5-1:AHD Company uses straight-line depreciationfor a machine was purchased on Jan1 2017, costing BD42,500, with an estimated five-year life and a BD2,500 salvage value. At the beginning of the fourth year,AHD company determines that the machine has three more years of remaining useful life, after which it have an salvage value BD2,000.Required:1-Compute the machine%u2019s book value at the end of third year.2-Compute the amount of depreciation for each of the final three years given the revised estimates.Solution:1-a) Depreciation Expense for the first 3 years = 42,500%u22122,5005= BD8,000b) Accumulated Depreciation = 8,000 %u00d7 3 = BD24,000c) Book Value = 42,500 %u201324,000 = BD18,5002-Depreciation for each of the three remaining years= %ud835%udfcf%ud835%udfd6,%ud835%udfd3%ud835%udfce%ud835%udfce%u2212%ud835%udfd0,%ud835%udfce%ud835%udfce%ud835%udfce%ud835%udfd1=BD5,500Objective (1)Revising Periodic DepreciationDepreciation for each of the remaining years =%ud835%udc69%ud835%udc90%ud835%udc90%ud835%udc8c%ud835%udc7d%ud835%udc82%ud835%udc8d%ud835%udc96%ud835%udc86%u2212%ud835%udc79%ud835%udc86%ud835%udc97%ud835%udc8a%ud835%udc94%ud835%udc86%ud835%udc85%ud835%udc7a%ud835%udc82%ud835%udc8d%ud835%udc97%ud835%udc82%ud835%udc88%ud835%udc86%ud835%udc7d%ud835%udc82%ud835%udc8d%ud835%udc96%ud835%udc86%ud835%udc79%ud835%udc86%ud835%udc97%ud835%udc8a%ud835%udc94%ud835%udc86%ud835%udc85%ud835%udc79%ud835%udc86%ud835%udc8e%ud835%udc82%ud835%udc8a%ud835%udc8f%ud835%udc8a%ud835%udc8f%ud835%udc88%ud835%udc7c%ud835%udc94%ud835%udc86%ud835%udc87%ud835%udc96%ud835%udc8d%ud835%udc8d%ud835%udc8a%ud835%udc87%ud835%udc86Revised Remaining Useful life = Proposed useful Life %u2013Years of Consumption