FAR · Select transactions · 9 practice questions
Compute Depreciation After a Method or Useful Life Change
After a justified depreciation-method change or estimate revision, calculate future depreciation from current carrying amount, not original cost. Below: a worked calculation and free practice questions using carrying amount and revised inputs.
Try one first
Hint
First determine whether the change affects prior periods or only future periods. Then identify the correct dollar base to allocate over the correct unit base.
Answer D. A change in depreciation method is accounted for prospectively as a change in estimate. Carrying amount on Jan. 1, 20X6 is $720,000 less three years of straight-line depreciation (720,000/12 = 60,000 per year; 3 years = 180,000), or $540,000. Allocate that $540,000 over the remaining expected 420,000 units (≈ $1.285714 per unit) and multiply by 84,000 units produced in 20X6 to get $108,000.
Why not A: This reflects continuing the original straight-line amount (60,000 per year). That ignores the justified switch to units-of-production and the requirement to apply the new method prospectively beginning in the period of change.
Why not B: This equals $720,000 divided by total expected units (180,000 produced + 420,000 remaining = 600,000) × 84,000, which wrongly mixes prior-period usage into the current-period calculation. Prior periods are not restated; depreciation uses the carrying amount at the date of change.
Why not C: This equals $720,000 divided by the remaining 420,000 units × 84,000, which incorrectly uses original cost rather than the carrying amount (cost less accumulated depreciation) as the depreciable base at the date of change.
Worked example
Maple Co. bought equipment for $400,000 on January 1, Year 1. It used double-declining balance over five years with no salvage value. On January 1, Year 3, new usage data justify switching to straight-line, revising total useful life to eight years from acquisition, and setting salvage at $24,000. Prior depreciation was correct. Assume full-year depreciation.
| 1 | Year 1 depreciation under the old method$400,000 × (2 / 5) | $160,000 |
| 2 | Year 2 depreciation under the old method($400,000 - $160,000) × 40% | $96,000 |
| 3 | Carrying amount at the change date$400,000 - $160,000 - $96,000 | $144,000 |
| 4 | Revised remaining useful life8 total years - 2 years used | 6 years |
| 5 | Remaining straight-line depreciable amount$144,000 - $24,000 revised salvage | $120,000 |
| 6 | Year 3 depreciation$120,000 / 6 years | $20,000 |
Maple recognizes $20,000 of depreciation expense in Year 3, with no adjustment to prior depreciation or opening retained earnings.
Check: The $120,000 left to depreciate is six equal $20,000 charges, leaving the $24,000 salvage untouched.
Key points
- When switching to double-declining balance, use carrying amount × (2 / remaining years), without depreciating below salvage.
- For units-of-production, divide carrying amount less salvage by remaining expected units, then multiply by current-period units.
- A life or salvage revision without a method change is a change in accounting estimate.
- Correct a material prior-period error first; future depreciation starts from the corrected carrying amount.
How the exam traps you
- Dividing original cost less salvage by the revised total life. Use carrying amount less updated salvage over revised remaining life for straight-line.
- Recording a cumulative catch-up in current income or opening retained earnings for a justified method change. Leave correctly recorded prior depreciation unchanged; apply the new method from the change date.
- Using the old remaining life or ignoring revised salvage. Remaining years equal revised total life minus years used; straight-line depreciation excludes updated salvage.
Question 2
Hint
Focus on which item is a true change in estimate-related accounting treatment, not a correction of something that was wrong before.
Answer C. A change in depreciation method for existing long-lived assets is treated as a change in accounting estimate (often described as a change in estimate effected by a change in accounting principle). Under U.S. GAAP (ASC 250), such changes are applied prospectively from the date of change; prior-period depreciation is not restated.
Why not A: A voluntary change between acceptable inventory costing methods is a change in accounting principle. Under U.S. GAAP it is generally applied retrospectively (if practicable), so this is not the prospective exception.
Why not B: Failing to accrue an expense in a prior period is a prior-period error. Material prior-period errors are corrected by restating prior-period financial statements or adjusting opening retained earnings, not by prospective treatment.
Why not D: A mathematical mistake is a prior-period error, not a change in estimate. Material mathematical errors are corrected retrospectively (or by adjusting opening retained earnings), not prospectively.
Question 3
Hint
Separate the choices into four buckets: pure estimate change, change in principle, special depreciation-method category, and error correction.
Answer C. Under ASC 250, a change in depreciation method is treated as a change in accounting estimate effected by a change in accounting principle and is accounted for prospectively. The change reflects a revised estimate of the pattern in which future economic benefits will be consumed, so the new method is applied in the current and future periods and prior periods are not restated.
Why not A: Tempting because it is also recognized prospectively, but this is a pure change in accounting estimate (useful life), not the special 'estimate effected by a change in principle' category since the depreciation method itself did not change.
Why not B: Although this is a change in accounting principle, inventory-costing method changes are generally treated as regular changes in accounting principle and are accounted for retrospectively (when practicable), not prospectively as the special depreciation-method category is.
Why not D: This describes a prior-period error (omission due to a spreadsheet setup error). Material errors are corrected by restating prior-period financial statements or by adjusting opening balances when prior statements are not presented, not by prospective recognition.
Question 4
Hint
Classify each item first: error correction, change in principle, or change in estimate. Then ask which one is specifically treated prospectively even though it involves a principle-related change.
Answer A. A change in depreciation method is treated under U.S. GAAP as a change in accounting estimate effected by a change in accounting principle and therefore is applied prospectively. Companies do not restate prior-period financial statements for this change; the new method is used in the current and future periods. That makes this item the exception to the general retrospective rule for changes in accounting principle.
Why not B: This is a change in accounting principle (choice of inventory cost-flow assumption). Such changes are generally applied retrospectively when practicable, so this follows the general rule rather than being an exception.
Why not C: A change in useful life is a change in accounting estimate and is accounted for prospectively. However, it is not the specific exception to the retrospective rule for changes in accounting principle (the question asks for that carve-out).
Why not D: This is an error correction (a prior-period mathematical error), not a change in accounting principle. Material prior-period errors are corrected by restating prior-period financial statements (a prior-period adjustment), not by applying the accounting-change rules for principles.
Question 5
Hint
Classify each matter first: was the prior accounting reasonable based on information available at the time, or was it wrong when originally recorded?
Answer A. A change to useful life or residual value is a change in accounting estimate and is accounted for prospectively from the date of change. By contrast, capitalizing routine maintenance that should have been expensed is a material prior-period error; when comparative financial statements are presented, the prior-period amounts (Year 2) should be restated to correct the error.
Why not B: Although the depreciation revision is based on new information and is handled prospectively, the maintenance capitalization was an error when recorded (not merely a later estimate change) and thus requires correction of the prior-period comparative amounts if material.
Why not C: This confuses changes in accounting principle with changes in estimate. Revising useful life/residual value is a change in estimate and is not applied retrospectively; only the maintenance capitalization (a prior-period error) requires restatement of Year 2 amounts.
Why not D: Treating a material Year 2 error as a Year 3 catch-up in current earnings would misstate comparative information. When comparative statements are presented, material prior-period errors should be corrected by restating the prior-period amounts.
Question 6
Hint
First classify each item as a change in estimate, a change in accounting principle, or a prior-period error; then recall whether that classification requires retrospective application.
Answer B. A change in depreciation method is treated as a change in accounting estimate and is applied prospectively, so prior periods are not revised. A change from weighted-average to FIFO is a change in accounting principle and is applied retrospectively when practicable. An omitted Year 2 accrued bonus is a prior-period error and requires correction by restating the prior comparative periods.
Why not A: This is tempting because inventory costing methods are changes in accounting principle, and many accounting-principle changes require retrospective application. However, the stem excludes LIFO and a weighted-average→FIFO change is generally applied retrospectively when practicable, so item 2 is not the exception.
Why not C: This distractor may lure candidates who think a discovered liability is corrected in the current year, but the omission of an accrued bonus from Year 2 is a prior-period error that must be corrected by restating the affected prior-period financial statements.
Why not D: This choice is appealing because both items 1 and 2 involve changes in methods, but they are different classifications: item 1 is a change in estimate (prospective), while item 2 is a change in accounting principle (retrospective when practicable). Therefore item 2 should be applied retrospectively and D is incorrect.
Question 7
Hint
First decide whether Orion discovered an error or obtained better information about how to allocate the asset's remaining cost.
Answer C. Under U.S. GAAP, a change in depreciation method is accounted for prospectively as a change in estimate effected by a change in accounting principle. Orion should use the asset's carrying amount at the date of the change and depreciate that amount over the remaining useful life or expected units of production. Prior periods are not restated and no prior-period adjustment to retained earnings is made.
Why not A: Many accounting principle changes require retrospective application, so this is tempting. However, depreciation method changes are treated as estimate changes effected by a change in principle and are applied prospectively, not by restating prior-period statements.
Why not B: Prior-period adjustments to beginning retained earnings are used to correct material errors in previously issued financial statements. The facts state there is no error, this is a justified change in method and is not accounted for as a prior-period adjustment.
Why not D: This distractor appeals to a mistaken idea of preserving consistency for existing assets. GAAP requires that the preferable method be applied prospectively to existing assets as of the date of change (using the carrying amount at that date), not limited only to newly acquired assets.
Question 8
Hint
First classify each situation: change in principle, change in estimate, change in reporting entity, or error correction. Then ask which classification does not revise prior comparative amounts.
Answer A. A change in depreciation method resulting from new information about the pattern of future benefits is treated as a change in accounting estimate effected by a change in accounting principle under ASC 250 and is accounted for prospectively. The asset's current carrying amount is depreciated using the new method over the remaining useful life; prior-period comparative amounts are not revised.
Why not B: This is a voluntary change in accounting principle; absent a specific exception, such changes are generally applied retrospectively (assuming practicability), so prior-period amounts would be restated rather than treated prospectively.
Why not C: The omission of a material asset and resulting misstatement of expense is a prior-period error. Material prior-period errors are corrected by restating prior-period financial statements and adjusting opening balances in the earliest period presented.
Why not D: Because the subsidiary was owned in both periods, issuing consolidated statements constitutes a change in reporting entity. Changes in reporting entity are handled retrospectively by recasting prior-period financial statements to the new reporting-entity basis.
Question 9
Hint
First determine how U.S. GAAP classifies a change in depreciation method, then decide whether you use original cost or carrying amount at the date of change.
Answer A. The change is accounted for prospectively as a change in estimate. Under double-declining on a 10-year life, Year 1 depreciation = $500,000 × 20% = $100,000; Year 2 = ($500,000 − $100,000) × 20% = $80,000. Carrying amount at January 1, Year 3 = $500,000 − $100,000 − $80,000 = $320,000. Depreciate prospectively using straight-line to the revised $20,000 salvage over the remaining 6 years: ($320,000 − $20,000) / 6 = $50,000.
Why not B: This applies straight-line to the carrying amount over the remaining 6 years but ignores the revised salvage value (320,000 / 6 = $53,333). The correct prospective basis is carrying amount less the new salvage.
Why not C: This treats the new estimates as if they had applied from acquisition: ($500,000 − $20,000) / 8 = $60,000. That would be retrospective treatment; under U.S. GAAP the change is applied prospectively to the carrying amount at the date of change.
Why not D: This continues the old double-declining-balance rate on the new carrying amount (20% × $320,000 = $64,000). Because Rho changed to straight-line on January 1, Year 3, Year 3 must be computed using the new method and revised estimates.
Common questions
How do you calculate depreciation after a change in method?
Start with cost minus accumulated depreciation at the change date. Apply the new method using that carrying amount, updated salvage, and revised remaining life or expected output.
Is a change in depreciation method prospective or retrospective?
It is prospective: a change in accounting estimate effected by a change in accounting principle. Do not restate prior periods or record a cumulative catch-up for the method change.
What if a prior-period depreciation error is also discovered?
Correct a material prior-period error retrospectively by restating affected comparative amounts and adjusting opening retained earnings of the earliest period presented for effects before that period. Then compute future depreciation prospectively from the corrected carrying amount.
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