Correct Answer: D
Explanation:
Choice 'd' is correct. A change in estimated useful life is a change in accounting estimate, and is therefore accounted for prospectively. The revised useful life should be used as of the beginning of the year of the change and should be applied to the current book value of the fixed asset.
The first step in determining the depreciation expense in the year of the change in estimate is to determine the book value of the labeling machine at the time of the change:
Original cost $46,000
- Accumulated depreciation 15,000 = [(46,000 - 1,000) / 12] *4
Current book value $31,000
This book value is then depreciated over the remaining life of the fixed asset based on the new estimated life. In this problem, the new estimated life is 10 years, four of which have already passed, so the asset must be depreciated over the remaining 6 years:
($31,000 - 1,000) / 6 = $5,000
Choice 'a' is incorrect. This answer is incorrectly calculated by adding the salvage value to the current book value, and by using the entire 10 year revised estimated life. Salvage value should always be subtracted and the asset should only be depreciated over the remaining life of the asset.
Choice 'b' is incorrect. This is the annual depreciation before the change in estimated life ($46,000 -$1,000) / 12 = $3,750]. The depreciation after the change in estimate should be calculated as described above.
Choice 'c' is incorrect. This would have been the annual straight-line depreciation if the original useful life of the asset had been 10 years rather than 12 years. The change in estimated life is applied prospectively, as described above, not retrospectively.
Comprehensive Income
