D is corrent. The requirement is to determine the amount of depreciation expense that Spirit should report in its financial statements for the year ending December 31, y;ear 6. A change in estimated life of an asset is a change in accounting estimate and is accounted for on a prospective basis in the current year and future years. To account for this change in estimate, the carrying value of the asset is calculated as of the beginning of the year of the change. Spirit acquired the asset in year 1; therefore, Spirit has depreciated the asset for five years (year 1, year 2, year 3, year 4, and year 5). Depreciation expense using the straight-line method and no salvage value was $4,000 ($48,000 ÷ 12 years) per year. Therefore, accumulated depreciation at January 1, year 6, was $20,000 ($4,000 × 5 years). The book value at January 1, year 6, is equal to $28,000 ($48,000 cost – $20,000 accumulated depreciation), and the remaining life is 10 years (7 years remaining + 3 years extended life). Therefore, this answer is correct because depreciation expense for year 6 is equal to $2,800 ($28,000 ÷ 10 years)
A is incorrect. A change in estimated life of an asset is a change in accounting estimate and is accounted for on a prospective basis in the current year and future years. To account for this change in estimate, the carrying value of the asset is calculated as of the beginning of the year of the change. Spirit acquired the asset in year 1; therefore, Spirit has depreciated the asset for five years (year 1, year 2, year 3, year 4, and year 5). Depreciation expense using the straight-line method and no salvage value was $4,000 ($48,000 ÷ 12 years) per year. Therefore, accumulated depreciation at January 1, year 6, was $20,000 ($4,000 × 5 years). The book value at January 1, year 6, is equal to $28,000 ($48,000 cost – $20,000 accumulated depreciation), and the remaining life is 10 years (7 years remaining + 3 years extended life). Therefore, depreciation expense for year 6 is equal to $2,800 ($28,000 ÷ 10 years)
B is incorrect. A change in estimated life of an asset is a change in accounting estimate and is accounted for on a prospective basis in the current year and future years. To account for this change in estimate, the carrying value of the asset is calculated as of the beginning of the year of the change. Spirit acquired the asset in year 1; therefore, Spirit has depreciated the asset for five years (year 1, year 2, year 3, year 4, and year 5). Depreciation expense using the straight-line method and no salvage value was $4,000 ($48,000 ÷ 12 years) per year. Therefore, accumulated depreciation at January 1, year 6, was $20,000 ($4,000 × 5 years). The book value at January 1, year 6, is equal to $28,000 ($48,000 cost – $20,000 accumulated depreciation), and the remaining life is 10 years (7 years remaining + 3 years extended life). Therefore, depreciation expense for year 6 is equal to $2,800 ($28,000 ÷ 10 years)
A is incorrect. A change in estimated life of an asset is a change in accounting estimate and is accounted for on a prospective basis in the current year and future years. To account for this change in estimate, the carrying value of the asset is calculated as of the beginning of the year of the change. Spirit acquired the asset in year 1; therefore, Spirit has depreciated the asset for five years (year 1, year 2, year 3, year 4, and year 5). Depreciation expense using the straight-line method and no salvage value was $4,000 ($48,000 ÷ 12 years) per year. Therefore, accumulated depreciation at January 1, year 6, was $20,000 ($4,000 × 5 years). The book value at January 1, year 6, is equal to $28,000 ($48,000 cost – $20,000 accumulated depreciation), and the remaining life is 10 years (7 years remaining + 3 years extended life). Therefore, depreciation expense for year 6 is equal to $2,800 ($28,000 ÷ 10 years)
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