On January 1, 2015, Rabbit Corp. acquired machinery that it depreciated using the straight-line method with an estimated useful life of 15 years and no residual value. On January 1, 2020, Rabbit estimated that the remaining life of this machinery was six years with no residual value. This change should be accounted for
A) as a prior period adjustment.
B) as the cumulative effect of a change in accounting principle in 2020.
C) by setting future annual depreciation equal to one-sixth of the book value on January 1, 2020.
D) by continuing to depreciate the machinery over the original 15-year life.

Question

Quizplus · Accepted Answer

As per the question, the estimated remaining life of the machinery was changed from 9 years (15-6) to 6 years. Thus, the depreciation expense should be adjusted to reflect the change in the remaining life. This can be done by setting future annual depreciation equal to one-sixth of the book value on January 1, 2020 (option C). This will result in the same total depreciation expense over the life of the asset as originally estimated. Option A is incorrect as there is no error in the prior period financial statements. Option B is incorrect as this is not a change in accounting principle but a change in estimate. Option D is incorrect as it does not reflect the change in the estimated remaining life.