Lec13 - Long-lived Assets 15.511 Corporate Accounting Summer 2004 Professor SP Kothari Sloan School of Management Massachusetts Institute of

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

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This note was uploaded on 04/05/2010 for the course FINANCE AN FRE6003 taught by Professor Marshall,ingridm during the Spring '09 term at NYU Poly.

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Lec13 - Long-lived Assets 15.511 Corporate Accounting Summer 2004 Professor SP Kothari Sloan School of Management Massachusetts Institute of

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