Question

You are the accountant for a small business. On January 2, 2014, the business purchased a large piece of equipment for $300,000. At that time, you used straight line depreciation, with no salvage value to depreciate the equipment over 10 years. It is now January 2, 2016 and you realize that your estimate on the useful life was inaccurate. You now estimate that the equipment will only be useful for 5 years from the date of acquisition.

Write a memo to the President, Janet Brown, describing how this change will affect the 2016 financial statements, both the income statement and balance sheet. Explain how you calculated the new depreciation expense and accumulated depreciation. Also, discuss how this change will affect prior year’s financial statements.

Remember your audience. Your memo must be concise. It must be completely free of spelling and grammatical errors. Refer to the textbook, Change in Estimates for Depreciation.

Answer 1