Revised Depreciation
Overview
As the depreciation is calculated based on the estimation in the accounting process, the company may find that the depreciation made is too low or too high which results in the carrying value of its fixed assets not reflect the actual net realizable value. In this case, the company may need to calculate the revised depreciation by changing its useful life or salvage value and make the journal entry for the revised depreciation in the current and future period.
Revised depreciation will not affect the previous depreciation even though the depreciation made was based on the wrong estimation. This is due to revised depreciation is considered as the change in accounting estimate, not the change in accounting policy. Hence, the effect of adjustment that comes from the revised depreciation will apply prospectively in financial statements.
Calculate revised depreciation
The company can calculate the revised depreciation by determining the remaining depreciable cost with the formula of deducting the accumulated depreciation and salvage value at the revision date from the original cost of the fixed asset. And then divide the remaining depreciable cost with the remaining useful life to determine the revised depreciation.
Revised depreciation journal entry
After the calculation, the company can make the revised depreciation journal entry by debiting the calculated amount of revised depreciation to the depreciation expense account and crediting the same amount to the accumulated depreciation account.
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 000 | |
| Accumulated depreciation | 000 |
Although this journal entry is the same as the depreciation journal entry, its amount is different from the previous depreciation. This is due to the revised depreciation only apply to the current period onward and the previous depreciation journal entry will not be revised. So, the amount could be lower or higher based on the decision that the company makes in the revision of depreciation.
Revised depreciation example
For example, the company ABC has a delivery truck with the original cost of $32,000 and an estimated salvage value of $2,000. The truck was originally expected to have 6 years of useful life. However, after 2 years of intensive use, the company ABC estimates that the truck will only last for 2 more years with the same salvage value of $2,000.
Likewise, the company decides to make the revision of depreciation of the truck in the third year. And the company has used the straight-line method to depreciate the truck.
Calculate the revised depreciation and make the journal entry for revised depreciation in year 3 and year 4.
Solution:
Calculate the revised depreciation
As the truck has been used and depreciated for two years, we can determine the accumulated depreciation as below:
First-year depreciation = ($32,000 – $2,000) / 6 = $5,000
Second-year depreciation = ($32,000 – $2,000) / 6 = $5,000
Accumulated depreciation = $5,000 + $5,000 = $10,000
In this case, we can determine the remaining depreciable cost as below:
Remaining depreciable cost = $32,000 – $10,000 – $2,000 = $20,000
Therefore, we can calculate the revised depreciation as below:
Revised depreciation = $20,000 / 2 = $10,000 per year
Journal entry for revised depreciation
With the result of the revised depreciation calculation of $10,000, we can make the revised depreciation journal entry for the year 3 and year 4 as below:
Year 3
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 10,000 | |
| Accumulated depreciation – truck | 10,000 |
Year 4
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 10,000 | |
| Accumulated depreciation – truck | 10,000 |