Question

Burbank Company owns the building occupied by its administrative office. The office building was reflected in the accounts at the end of last year as follows:

Cost when acquired …………………………………….…… $330,000
Accumulated depreciation (based on straight-line depreciation, an
estimated life of 50 years, and a $30,000 residual value) ………. 78,000
During January of this year, on the basis of a careful study, management decided that the total estimated useful life should be changed to 30 years (instead of 50) and the residual value reduced to $22,500 (from $30,000). The depreciation method will not change, i.e. they will keep using straight-line deprecation.
Required:
1. Compute the annual depreciation expense prior to the change in estimates.
2. Compute the annual depreciation expense after the change in estimates.
3. What will be the net effect of changing estimates on the balance sheet, net income, and cash flows for the year?

Answer 1

Burbank Company

1. The annual depreciation expense prior to the change in estimates is:

= $6,000.

2. The annual depreciation expense after the change in estimates is:

= $10,250.

3. The net effect of the changing estimates on the balance sheet, net income, and cash flows for the year:

The balance sheet = the accumulated depreciation will increase to $88,250.

The net income will reduce by $4,250.

The cash flows will not be affected, as depreciation is not a cash flow item.

Step-by-step explanation:

a) Data and Calculations:

Cost of office building = $330,000

Accumulated depreciation = $78,000

Estimated useful life = 50 years

Estimated residual value = $30,000

Depreciable amount = $300,000

Annual depreciation expense (straight-line method) = $6,000 ($300,000/50)

Revised Estimates:

Cost of office building = $330,000

Accumulated depreciation = $78,000

Estimated useful life = 30

Residual value = $22,500

Depreciable amount = $307,500

Annual depreciation expense (straight-line method) = $10,250 ($307,500/30)