Question

The Peridot Company purchased machinery on January 2, 2019, for $970,000. A five-year life was estimated and no residual value was anticipated. Peridot decided to use the straight-line depreciation method and recorded $194,000 in depreciation in 2019 and 2020. Early in 2021, the company revised the total estimated life of the machinery to eight years.

Required:
1. What type of change is this?
2. Is Peridot required to revise prior years’ financial statements as a result of the change?
3. Is Peridot required to provide a disclosure note to report the change?
4. Determine depreciation for 2021.

Answer 1

The change in the estimated life of machinery is a change in accounting estimate, which is dealt with prospectively and does not require prior financial statements to be revised. A disclosure note is required to explain the nature and effect of the change. The depreciation for 2021 is calculated to be $97,000 based on the revised remaining life of the asset.

Step-by-step explanation:

The change in the estimated life of machinery that Peridot Company is dealing with is a change in accounting estimate. This type of change occurs when new information or better insight requires a company to reassess its assumptions about the future benefits of assets.

Peridot is not required to revise prior years' financial statements for a change in accounting estimate. These changes are accounted for prospectively, meaning they affect the financial statements of the current and future periods.

Peridot is required to disclose the change in accounting estimate in the notes of the financial statements. The disclosure should include the nature of the change, the reason for the change, and the effect on the financial statements.

For the depreciation in 2021, the remaining book value after depreciation in 2019 and 2020 is $970,000 - (2 * $194,000) = $582,000. Now, we need to spread this over the new remaining life of 6 years (8 total - 2 used), which is equal to $582,000 / 6 = $97,000 depreciation for 2021.