Answer:
Change in accounting estimate
Depreciation for 2018: $80,000
Explanation:
A change in accounting estimate occurs when there is new information that surfaces, affecting the initial situation. It can affect the carrying amount of an asset or liability as well as alter the accounting for existing and future assets or liabilities.
The machine has a cost of $800,000. It is depreciated using the straight-line method of depreciation. Hence, the depreciation expense is the same annually throughout the life of the asset.
Annual depreciation = (Cost of asset - salvage value) / number of useful years
Old annual depreciation = ($800,000-0) / 5 = $160,000 per year.
By January 2018, the asset has depreciated for two years. Hence the book value of the asset as at 2018 is the difference between the cost of the asset and the total depreciation expense i.e. $800,000 - (160,000 x 2)
= $480,000.
According to the new depreciation estimate, the asset has a useful life of 8 years. Hence the remaining years is 6 years ( 8 - 2).
The annual depreciation currently is = ($480,000 - 0) / 6 = $80,000
Depreciation expense for 2018 = $80,000
