Financial Accounting: An Integrated Statements Approach, 2nd Edition

During the third year, the company estimates that the remaining useful life is eight

years (instead of three) and that the residual value is $8,000 (instead of $10,000). The

depreciation expense for each of the remaining eight years is $10,000, computed as

follows:

Book value (undepreciated cost), end of second year $88,000

Less revised estimated residual value 8,000

Revised remaining depreciable cost $80,000

Revised annual depreciation expense ($80,000 ÷ 8 years) $10,000

Exhibit 7 shows the book value of the asset over its original and revised lives.

Notice that the book value declines at a slower rate beginning at the end of year 2 and

continuing until it reaches the residual value of $8,000 at the end of year 10, which is

the revised end of the asset’s useful life.

A change in estimate should be disclosed in the notes to the financial statements.

An example of such a disclosure is shown for St. Paul Companiesas follows:

Acceleration of Software Depreciation....The resulting strategy to standardize tech-

nology throughout...and maintain one data center in St. Paul, Minnesota, resulted

in the identification of duplicate software applications. As a result, the estimated use-

ful life for that software was shortened, resulting in an additional charge to earnings.

FIXED ASSET DISPOSALS

Fixed assets that are no longer useful may be discarded, sold, or exchanged for other

fixed assets.^4 Often, such transactions will give rise to gains and losses upon disposal.

The details of the entry to record a disposal will vary. In all cases, however, the book

410 Chapter 9 Fixed Assets and Intangible Assets

Q.An asset with an origi-

nal cost of $80,000 and

a residual value of

$12,000 was estimated to

have an eight-year life.

After three years, the asset

is estimated to have a re-

maining life of 10 years,

with no change in residual

value. What is the revised

depreciation expense for

the fourth year?

A.$4,250. The deprecia-

tion expense per year for

the first three years is

$8,500 per year

[($80,000$12,000) ÷

8]. The book value at the

end of the third year is

$54,500 [$80,000 

(3$8,500)]. The re-

maining book value less

the residual value divided

by the remaining life is

[($54,500$12,000) ÷

10].

Book Value

0

20,000

40,000

6 0,000

80,000

100,000

120,000

140,000

16 0,000

Year

0 1 2 3 4 5 6 7 8 9 10

Change in

Estimate

Exhibit 7

Book Value of Asset

with Change in Estimate

Account for the disposal

of fixed assets.

3

4 Accounting for fixed asset exchanges (trades) is a topic covered in advanced accounting courses.