Welcome. In this video we're going to

discuss what you do when you change depreciation estimates.

You may recall from our last video we looked at how to do depreciation in general.

And there were a lot of estimates we made.

How long we were going to use something?

How much it was going to be worth when we did sell it at the end?

--et cetera. Well, what happens if you change one of those estimates as you move forward.

Let's go ahead and go back to our old example.

Let me remind you we purchased a bus for

100000 total cost and we were expecting to use it over 10 years,

at the end of the 10 years we thought we were going to sell it for $40000.

So we created this sort of a spreadsheet to say here's what we expect each period.

6000 of depreciation expense each period

building up to an accumulated depreciation of $60000.

Well what happens if in say year three,

we change some of those assumptions.

We decide we're going to use that bus for

14 years instead of the 10 years we've been thinking.

Now since we're going to use the bus longer

we know we're not going to get 40000 for it anymore.

We believe we're only going to get 22000 for it now.

So the question becomes,

how do we account for these changes and estimates?

It's probably easiest to show you this using the T accounts again.

So where are we at at the beginning of year three?

While we have that 100000 that we know we spend up front on this and over

the last two years we've built up an accumulated depreciation of $12000,

that was $6000 we think we used up in year one and $6000 we think we used up in year two.

So at this point we know that we have

$88000 left to think about whether we're going to use it up.

All that we do is take that $88000

and think about redoing our calculation as if this is a new asset.

So we would look at it and say there's $88000 of value left to be used.

We believe we'll get $22000 of that value back when we actually sell the item.

So over the remaining time that we have this asset we believe there's

$66000 worth of value that we're going to use up.

How long are we going to do that over.

Well there's 12 years remaining now.

We've already used up 2 years of the total 14.

So this is just the 12 years going forward.

When we divide 66000 by 12 we come up with $5500 per year.

That's going to be our expense going forward now that we're

thinking we're going to use this asset over this longer time period.

How do we do the accounting?

Well it's actually the same as you saw in the last video.

But let me go ahead and remind you,

at the end of year one we say we have a depreciation expense of $5500.

That depreciation expense thing comes over to

accumulated depreciation to increase

our balance and accumulated depreciation at the end to $17500.

That 17500 is the amount of the asset we believe we've used up.

We still have that $100000 gross amount.

I want to remind you again that we don't actually touch that amount.

All the adjustments we do occur and accumulated depreciation.

Now what happens in the next year?

Well in year four we use up another 5500 of value.

We reflect the fact that that 5500 has disappear.

Meaning that our accumulated depreciation account now is 23000.

And of course, we don't touch that $100000 yet again.

And we would just continue doing this, year after year.

And again you can see that we could lay this out in a schedule.

This is our new schedule now reflecting that in year three,

as you can see in red,

we've changed our charge to $5500.

It goes all the way down to 14 now,

where we're going to have depreciated 78000 by

that point with a net book value of 22000 left.

Now one of the things I want you to notice here is

that when we bought this item in the very beginning and we'd

expected to use it over 14 years and have $22000 of salvage value for it.

We would have calculated a depreciation of

$5572 per year and we would have had an equal expense each year.

Because we changed our assumptions during the period,

you can see that we over depreciated in years and one in two.

And then from year 3 through 14,

our depreciation expense is a little lower than it would have

been to make up for the fact that we had over depreciated early in the life of the asset.

We're off a little bit each place but that's better

than going back and restated our entire financial statements.

In our next video we're going to think about what we do when we actually sell this item.