Squid Roe,Inc.'s $48,000 sushi bar was originally expected to be used for eight years with no residual value.Depreciation on the bar was $6,000 per year for the past two years.In the third year,management changed the estimated life of the bar to be a total of only six years instead of eight.What should Squid Roe do?
A)Go back and revise all previous years' depreciation expense to be $8,000 per year.
B)Revise the depreciation expense to be $9,000 for years three through six.
C)Continue to depreciate the bar at $6,000 per year and then show a loss when it removes the bar at the end of year six.
D)Disclose the new information in the notes to the financial statements,but do not change anything else.

Question

Quizplus · Accepted Answer

The amount of depreciation and amortization depends on three items: an asset's recorded cost,its estimated useful life,and its estimated residual value.When any one of these items changes,the amount of depreciation and amortization needs to change.At this point,the remaining useful life is 4 years (or revised estimate of 6 years − 2 years that have passed).
Revised depreciation = (Book value − New residual value)× (1 ÷ Remaining life)
= [$48,000 − ($6,000 per year × 2 years)− $0] × (1 ÷ 4)= $9,000 per year