ExpertHard1 markMultiple Choice
CPA · Question 08 · Area III: Select Transactions
On January 1, Year 1, Phoenix Corp. purchased a building for $800,000. The building has a useful life of 40 years with no salvage value. On January 1, Year 6, Phoenix determines that the building's total useful life should be 30 years instead of 40 years, with no change in salvage value.<br/><br/>What is the depreciation expense Phoenix should record for Year 6?
On January 1, Year 1, Phoenix Corp. purchased a building for $800,000. The building has a useful life of 40 years with no salvage value. On January 1, Year 6, Phoenix determines that the building's total useful life should be 30 years instead of 40 years, with no change in salvage value.<br/><br/>What is the depreciation expense Phoenix should record for Year 6?
Answer options:
A.
$20,000
B.
$26,667
C.
$28,000
D.
$32,000
How to approach this question
For changes in accounting estimates, apply the change prospectively. Calculate the current book value, determine the remaining useful life under the new estimate, then divide book value by remaining life for the new annual depreciation.
Full Answer
C.$28,000✓ Correct
$28,000
Under ASC 250-10-45-17, changes in accounting estimates are applied prospectively. The building's book value at 1/1/Year 6 is $700,000 ($800,000 - 5 years × $20,000). With a revised total life of 30 years, the remaining life is 25 years. New annual depreciation = $700,000 ÷ 25 years = $28,000.
Common mistakes
Applying the change retrospectively, using original cost instead of current book value, or miscalculating remaining useful life
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