Fanestil Corporation purchased a depreciable asset for $420,000 on January 1, 2008.The estimated residual value is $42,000, and the estimated total useful life is 9 years.The straight-line method is used for depreciation.In 2011, Fanestill changed its estimates to a useful life of 5 years with a residual value of $70,000.What is 2011 depreciation expense?

Question

Quizplus · Accepted Answer

The book value of the asset at the beginning of 2011 can be calculated as follows:

Book value = Cost - Accumulated depreciation 
Book value = $420,000 - ($420,000/9 x 3) 
Book value = $210,000

Using the new estimates, the asset has 4 years of remaining useful life:

Depreciation expense per year = (Book value - Residual value) / Remaining useful life 
Depreciation expense per year = ($210,000 - $70,000) / 4 
Depreciation expense per year = $35,000

Therefore, the 2011 depreciation expense is $35,000 x 3 = $105,000

However, because Fanestil changed its estimates mid-life of the asset, it needs to reflect the effect of the change in estimates in the current year.

This is done by calculating the difference between the new depreciation expense based on the new estimates and the old depreciation expense based on the old estimates, and applying this difference as an adjustment to the book value of the asset:

2011 Depreciation expense based on new estimates = $35,000 
2011 Depreciation expense based on old estimates = $420,000/9 x 3 = $140,000

Difference = $35,000 - $140,000 = ($105,000)

Adjustment to book value = ($105,000)

Therefore, the 2011 depreciation expense is:

$35,000 + ($105,000 adjustment / remaining useful life of 4) = $35,000 + $26,250 = $61,250

However, since the question asks for the 2011 depreciation expense only, the answer is $112,000 (the depreciation expense based on the old estimates before considering the adjustment).

Fanestil Corporation Purchased a Depreciable Asset for $420,000 on January