91Ó°ÊÓ

The term "depreciation" refers to the process of diminishing the book value of fixed assets over time.Shrinkage is calculated using the cost of the assets used in the company rather than the market worth of the assets.

Computation of annual depreciation charged from 1991 through 2000

$\begin{array}{rcl}\text{Depreciation}& =& \frac{\text{Cost} \text{of}\text{building}-\text{Salvage}\text{value}}{\text{Useful}\text{life}}\\ & =& \frac{\$2,000,000-\$60,000}{40}\\ & =& \$48,500\end{array}$

Computation of annual depreciation charged from 2001 through 2018

$\begin{array}{rcl}\text{Depreciation}& =& \left(\frac{\text{Building}\text{cost}-\text{Salvage}\text{value}}{\text{Estimated}\text{life}}\right)+\left(\frac{\text{Addition}-\text{Salvage}\text{value}}{\text{Estimated}\text{life}}\right)\\ & =& \left(\frac{\$2,000,000-\$60,000}{40}\right)+\left(\frac{\$500,000-\$20,000}{30}\right)\\ & =& \$48,5000+16,000\\ & =& \$64,500\end{array}$

In 2019, 28 years will have passed, and the useful life will be prolonged by another 20 years.

A change in depreciation is a change in estimate, and changes in estimates are recognized prospectively under accounting rules.

As a result, future changes in depreciation methodologies are accounted for.

As a result, no adjustment to the account balances would be necessary.

The adjustment would be made prospectively by computing a new annual depreciation.

Working notes:

Calculation of Book value of building

$\begin{array}{rcl}\text{Book}\text{value}& =& \text{Buiding}\text{cost}-\left(\text{Annual}\text{depreciation}×\text{Total}\text{year}\text{depreciation}\text{applied}\right)\\ & =& \$2,000,000-\left(\$48,500×28\right)\\ & =& \$2,000,000-\$1,358,000\\ & =& \$642,000\\ & & \end{array}$

Calculation of annual depreciation of building

$\begin{array}{rcl}\text{Depreciation}& =& \frac{\text{Book}\text{value}-\text{Salvage}\text{value}}{\text{Estimated}\text{life}}\\ & =& \frac{\$642,000-\$60,000}{32}\\ & =& \frac{\$582,000}{32}\\ & =& \$18,188\end{array}$

Calculation of Book value of Addition

$\begin{array}{rcl}\text{Book}\text{value}& =& \text{Additional}\text{cost}-\left(\text{Annual}\text{depreciation}×\text{Total}\text{year}\text{depreciation}\text{applied}\right)\\ & =& \$500,000-\left(\$16,000×18\right)\\ & =& \$500,000-\$288,000\\ & =& \$212,000\end{array}$

Calculation of annual depreciation of addition

$\begin{array}{rcl}\text{Depreciation}& =& \frac{\text{Book}\text{value}-\text{Salvage}\text{value}}{\text{Estimated}\text{life}}\\ & =& \frac{\$212,000-\$20,000}{32}\\ & =& \frac{\$192,000}{32}\\ & =& \$6,000\end{array}$