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

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

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

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

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.