Final answer:
A change in the estimated salvage value of a depreciable asset is accounted for prospectively, meaning the depreciation base adjustment applies to current and future periods only. Past financial statements are not revised. Subsequent depreciation expense calculations incorporate the new salvage value from the change point forward.
Step-by-step explanation:
When a change occurs in the estimated salvage value of a depreciable asset, accounting principles require that the change be accounted for prospectively, rather than retrospectively. This means that the depreciation base would be adjusted going forward from the point in time the estimate is changed. Depreciation is calculated using the new salvage value for the current and future periods only, without revising the depreciation expenses that were recorded in previous periods.
To clarify, if you determine that the salvage value of an asset is different from what was previously estimated, the remaining book value of the asset, less the revised salvage value, is spread out over the remaining useful life of the asset. No adjustments to past financial statements are made. This change is reflected only in the financial statements of the current period and those that follow.
For example, if a company realizes in the third year of using an asset that the salvage value should be lower than initially estimated, the new estimated salvage value will reduce the depreciation base. The company then recalculates the depreciation expense for the remainder of the asset's useful life based on this new information, updating future statements but not altering the ones from previous years.