Question

In order to handle changes in estimates prospectively, the asset's salvage value is subtracted from the book value at the time of the change, and this amount is divided by the asset's remaining estimated useful life.

A. True
B. False

Answer 1

The statement is True. When handling changes in estimates prospectively, the asset's salvage value is subtracted from the book value at the time of the change, and this amount is divided by the asset's remaining estimated useful life.

Step-by-step explanation:

The statement is True. When handling changes in estimates prospectively, the asset's salvage value is subtracted from the book value at the time of the change. Then, this amount is divided by the asset's remaining estimated useful life. This process is known as depreciation and it allocates the cost of an asset over its useful life.

For example, let's say a company purchases a machine for $10,000 with a useful life of 5 years and no salvage value. After 3 years, the company estimates that the machine will still be useful for another 2 years but its salvage value will be $1,000. In this case, the book value at the time of the change would be $10,000 - $1,000 = $9,000. Then, the change in estimate would be allocated over the remaining useful life by dividing $9,000 by 2 years, resulting in an annual depreciation expense of $4,500.