Final answer:
Changes in estimates for residual value or useful life are handled prospectively, impacting the calculation of depreciation expense from the time of the change forward. These adjustments are made to the remaining book value and spread over the new estimated life.
Step-by-step explanation:
Changes in the estimates for residual value or useful life of an asset result in changes in the depreciation expense calculation. These changes are typically handled on a prospective basis, which means that the new depreciation expense is calculated from the date of the change going forward. Accounting standards require that a change in accounting estimate is accounted for in the period of change if the change affects that period only or in the period of change and future periods if the change affects both.
For example, if a company realizes that an asset will now have a longer useful life than originally estimated, the remaining book value of the asset is spread out over the new estimated remaining life. This results in a lower annual depreciation expense. Similarly, if the residual value is raised, it implies that the total amount to be depreciated over the life of the asset decreases, again resulting in a lower annual depreciation expense.