Question

Which one of the following statements regarding revision of depreciation rates is incorrect?

a) No journal entry is made at the time a revision of depreciation rates occurs.
b) Depreciation expense recorded in previous periods is not adjusted when a change in estimate occurs.
c) Depreciation expense is computed by dividing the remaining book value less any residual value by the remaining estimated useful life.
d) Changes in estimate should be handled in the current and future periods only.

Answer 1

In depreciation accounting, the incorrect statement is that changes in estimate should be handled in the current and future periods only. Changes in depreciation rates are retroactively adjusted in previous periods as well to provide accurate financial statements.

Step-by-step explanation:

In depreciation accounting, the revision of depreciation rates is essential to reflect changes in the estimated useful life, residual value, or pattern of consumption of an asset. However, the incorrect statement in this case is d) Changes in estimate should be handled in the current and future periods only.

When there is a revision of depreciation rates, the impact of the change is retroactively adjusted in the financial statements of previous periods as well. This ensures that the financial statements provide accurate and reliable information to users.

For example, let's say a company initially estimates the useful life of an asset as 10 years but later determines that it is actually 8 years. To correct this error, the company would revise the depreciation rates for the previous two years to reflect the shorter useful life. By doing so, the company ensures that the financial statements portray a true and fair view of the entity's financial position and performance.