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Myers Company acquired machinery on January 1, 2005, which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2010, Myers estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by Myers?

Answer :

Final answer:

Myers Company should handle the change in the estimated remaining life of its machinery prospectively, adjusting the remaining book value of the asset over the revised remaining useful life.

Explanation:

The change in estimated useful life of the machinery by Myers Company on January 1, 2010, needs to be accounted for prospectively. This means the remaining book value of the machinery after depreciation up to December 31, 2009, should be spread over the revised remaining life, which is six years, starting from January 1, 2010.

Here's how to calculate the revised annual depreciation expense:

  1. Determine the machinery's original cost.
  2. Calculate the total depreciation expense up to December 31, 2009 (for five years).
  3. Subtract the accumulated depreciation from the original cost to find the book value as of January 1, 2010.
  4. Divide the book value by the revised remaining life of the machinery to get the new annual depreciation expense.

Myers Company will then charge this new depreciation expense against its income annually for the next six years.

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