Question

How do you calculate a revised depreciation expense if the residual value estimate changes?

Answer 1

To recalculate a revised depreciation expense after a change in the residual value estimate, deduct the accumulated depreciation from the asset's original cost to find its book value. Then subtract the new residual value from the book value, and divide the result by the remaining useful life to find the new depreciation expense.

Step-by-step explanation:

To calculate a revised depreciation expense when a residual value estimate changes, follow these steps:

1. Determine the asset's original cost and the original estimated residual value.
2. Calculate the amount of depreciation expense that has been recognized to date.
3. Subtract the recognized depreciation from the original cost to find the book value of the asset.
4. Subtract the new estimated residual value from the book value to find the depreciable base for the revised depreciation schedule.
5. Divide the depreciable base by the remaining useful life of the asset to arrive at the new annual depreciation expense.

For example, suppose an asset originally cost $10,000 with an estimated residual value of $1,000 and a useful life of 10 years. If after 5 years the residual value is revised to $2,000, the calculation would be as follows:

• Original cost = $10,000
• Accumulated depreciation after 5 years = ($10,000 - $1,000) / 10 * 5 = $4,500
• Book value at the end of year 5 = $10,000 - $4,500 = $5,500
• Depreciable base after revision = $5,500 - $2,000 = $3,500
• New annual depreciation expense = $3,500 / remaining 5 years = $700