How to change an asset’s useful life
For example, suppose your firm makes an estimate of an asset’s life at time of purchase, then a new estimate several years later. How does the change affect annual depreciation expense? Here is the answer.
Example: On Jan. 1, 20X5, DryCo acquires for $40,000 a machine with an estimated useful life of 10 years and no residual value which will be depreciated under the straight-line method. On Jan. 1, 20X9, DryCo changes the machine’s estimated useful life to 12 years. What is depreciation expense on the machine for 20X9 and subsequent years?
To compute:
| Original cost |
$40,000 |
| Accumulated depreciation through |
|
| 12/31/X8 (40,000/10 years = 4,000 x 4*) |
16,000 |
| Undepreciated balance on 1/X9 |
$24,000 |
* Depreciation for the 4 prior years
On Dec. 31, 20X9, DryCi records the following entry:
| Depreciation Expense |
3,000* |
|
| Accumulated Depreciation |
|
3,000 |
* 12 years (new estimated life) – 4 years already depreciated = 8 years to be depreciated
$24,000/8 yrs. = $3,000 new annual depreciation expense. Thus, depreciation expense for 20X9 and future years is $3,000 a year.
