Question

Myers Company acquired machinery on January 1, 2010 which it depreciated under the straight-line method with an estimated life of fifteen years and no residual value. On January 1, 2015, Myers estimated that the remaining life of this machinery was six years with no residual value. How should this change be accounted for by Myers?

a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2015
c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2015
d. By continuing to depreciate the machinery over the original fifteen year life

Answer 1

Myers should set future annual depreciation equal to one-sixth of the book value on January 1, 2015.

Step-by-step explanation:

The change in the estimated remaining life and depreciation method for the machinery should be accounted for by Myers as c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2015.

Under the straight-line method, the annual depreciation expense is determined by dividing the initial cost of the machinery by its estimated useful life. Since Myers estimated the remaining life of the machinery to be 6 years on January 1, 2015, it should now calculate its annual depreciation expense by dividing one-sixth of the book value on January 1, 2015 by the remaining useful life of 6 years.

This change in method does not require the adjustment to be treated as a prior period adjustment or a cumulative effect of a change in accounting principle. It simply means that going forward, Myers will use a different method to calculate the annual depreciation expense.