Question

Yukelson 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:
a, Cost when acquired $412,500
b. Accumulated depreciation (based on straight-line depreciation, an estimated life of 50 years, and a $37,500 residual value) 60,000

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.

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

Answer:

Yukelson Company

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

= $7,500.

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

= $13,000.

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

Balance Sheet:

The accumulated depreciation will increase by $5,500, thus reducing the net book value of the building.

Net Income:

The net income will be reduced by $5,500.

Cash Flows:

No effect on cash flows because depreciation is not a cash flow item.  The only adjustment will be when the net income is used to compute the cash flows.

Explanation:

a) Data and Calculations:

Cost Building = $412,500

Estimated residual value = $37,500

Estimated useful life = 50 years

Accumulated depreciation = $60,000

Depreciable amount = $375,000 ($412,500 - $37,500)

Annual depreciation expense = $7,500 ($375,000/50)

Revised residual value = $22,500

Revised useful life = 30 years

Depreciable amount = $390,000 ($412,500 - $22,500)

Annual depreciation expense = $13,000 ($390,000/30)