The Peridot Company purchased machinery on January 2, 2016, for $800,000. A five-year life was estimated and no residual value was anticipated. Peridot decided to use the straight-line depreciation method and recorded $160,000 in depreciation in 2016 and 2017. Early in 2018, the company revised the total estimated life of the machinery to eight years.
What type of change is this? Determine depreciation for 2018

Change in accounting estimate

Depreciation for 2018: $80,000

Explanation:

A change in accounting estimate occurs when there is new information that surfaces, affecting the initial situation. It can affect the carrying amount of an asset or liability as well as alter the accounting for existing and future assets or liabilities.

The machine has a cost of $800,000. It is depreciated using the straight-line method of depreciation. Hence, the depreciation expense is the same annually throughout the life of the asset.

Annual depreciation = (Cost of asset - salvage value) / number of useful years

Old annual depreciation = ($800,000-0) / 5 = $160,000 per year.

By January 2018, the asset has depreciated for two years. Hence the book value of the asset as at 2018 is the difference between the cost of the asset and the total depreciation expense i.e. $800,000 - (160,000 x 2)

= $480,000.

According to the new depreciation estimate, the asset has a useful life of 8 years. Hence the remaining years is 6 years ( 8 - 2).

The annual depreciation currently is = ($480,000 - 0) / 6 = $80,000

Depreciation expense for 2018 = $80,000

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