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CFA Level I · CFA Level I Exam · Analysis of Long-Term Assets

On 1 January, a company owns a machine with cost of 900,000, accumulated depreciation of 450,000 after 5 years of a 10-year straight-line life, and zero residual value. At that date, management revises the remaining useful life to 3 years from 5 years and the residual value to 90,000. Depreciation expense for the current year is most likely closest to:

Depreciation is about 120,000. A change in estimate is applied prospectively, so the carrying amount of 450,000 less the new residual value of 90,000, or 360,000, is spread over the revised remaining life of 3 years. No restatement of prior years occurs.

  1. A90,000
  2. B120,000Correct
  3. C150,000

Explanation

Changes in estimates are applied prospectively. Carrying amount = 900,000 - 450,000 = 450,000. Less new residual 90,000 = 360,000 depreciable. Over 3 years = 120,000. Using the original 5 remaining years gives 90,000; ignoring residual gives 150,000.

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