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# lec13 - Long-lived Assets 15.511 Corporate Accounting...

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1 Long-lived Assets 15.511 Corporate Accounting Summer 2004 Professor SP Kothari Sloan School of Management Massachusetts Institute of Technology June 29, 2004

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Changes in Depreciation Estimates Caused by change in asset life or Salvage Value Apply the change prospectively, i.e., to future years (no restatement of past years’ results) Example: Cost = \$100K, SV = 0, Initial UL estimate of 5 years. After 2nd year, spend \$30K on improvement that extends UL by 3 years (i.e., to total of 8). What is annual depreciation expense for each of the first two years? What is book value at the end of 2nd year? How do we account for the improvement? What is annual depreciation expense for years 3 and beyond? 2
Changes in Depreciation Estimates Example: Cost = \$100K, SV = 0, Initial UL estimate of 5 years. After 2nd year, spend \$30K on improvement that extends UL by 3 years (i.e., to total of 8). What is annual depreciation expense for each of the first two years? \$(100 – 0)/5 = \$20K What is book value at the end of 2nd year? \$[100 – (20*2)] K = \$60k How do we account for the improvement? Capitalize the improvement costs. BV increases to \$ (60+30) = 90K What is annual depreciation expense for years 3 and beyond? Years left = (5-2) + 3 = 6 Therefore, depreciation expense = \$90K/6 = \$15 3

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Changes in Depreciation Estimates Acc. = L Ret. Depr Cash PP&E Earn Acquire PP&E Yr 1 Depr. Yr 2 Depr Improve ment Year 3 Depr. 4
Changes in Depreciation Estimates Acc. = L Ret. Depr Cash PP&E Earn Acquire 100 100 PP&E Yr 1 Depr. Yr 2 Depr Improve ment Year 3 Depr. 5

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Changes in Depreciation Estimates Acc. Cash PP&E = L Ret. Depr Earn Acquire 100 100 PP&E Yr 1 20 Depr. Yr 2 20 20 Depr Improve ment Year 3 Depr. 20 6
Changes in Depreciation Estimates Acc. Cash PP&E = L Ret.

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