Cory Company
acquired some machinery on January 2, year 2. Cory was using straight-line
depreciation with an estimated life of 15 years with no salvage value for this
machinery. On January 2, year 6, Cory estimated that the remaining life of this
machinery was 6 years with no salvage value. How should this change be
accounted for by Cory?

A)
Revising future depreciation per year to equal
the book value of January 2, year 6, divided by 6.

B)
Making a prior period adjustment and changing to
an accelerated depreciation method that will compensate for under-depreciation
in prior years.

C)
Estimating the effect of the change on each
year’s net earnings, but maintaining the method of depreciation as originally
determined.

D)
Revising future depreciation per year to equal
the original cost divided by 6.

Revising future
depreciation per year to equal the book value of January 2, year 6, divided by
6 is correct. Cory Company’s change of depreciation is considered a change in
estimate. A change in estimate is treated prospectively by revising the
remaining years’ depreciation expense. Book value of the asset at the time of
change should be divided by 6, the estimated remaining life.

The key thing to remember here is that whenever an issuer changes depreciation methods because their estimation was off, they have to account for the change in the current year and future years. Estimations are just that, estimations. So, there were no mathematical errors really. The book value, not the historical or original cost, would be used to recalculate the new depreciation expenses for each remaining year.

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