7. Jagged Company owns the building occupied by its administrative office. The o

Question

7. Jagged Company owns the building occupied by its administrative office. The office building was reflected in the accounts at the end of last year as follows: Cost when acquired Accumulated depreciation 330,000 78,000 Depreciation expense is based on straight-line depreciation, an estimated useful life of 50 years, and a $30,000 residual value. On January 1s of this year, on the basis of a careful study, management decided that the total estimated useful life should be changed to 30 years (instead of its original estimate of 50 years) and the residual value reduced to $22,500 (from $30,000). They will keep using straight-line deprecation method. a. Compute the annual depreciation expense prior to the change in estimates. b. Compute the annual depreciation expense after the change in estimates. What is the net effect of the change in estimates on the net income and total cash flow for this year (i.e. will they increase or decrease and by how much under the new estimates compared to the original estimates)? (Assume there is no tax in your answer) c.

Explanation / Answer

a) Annual Depreciation Expenses Prior Changes In estimates

Straight Line Method Depreciation =( Original Cost - Residual Value) /Useful Life Of Assets

= (330000$ -30000$)/50= 6000 $

b) Annual Depreciation Expenses After Changes In estimates

Straight Line Method Depreciation =( Original Cost - Residual Value) /Useful Life Of Assets

= (330000$ -22500$)/30= 10250 $

c) In this Year Net Income , Decrease Amount of 55250$ and Current Year Depreciationamount 10250$

( Total 13 Years depreciation Adjusted The Past 13 Year Depreciation Amount is, (10250$ -6000$ )*13= 55250$)

In Current Year Cash flow statement Increase The amount 55250 $ old depreciation and Current year Depreciation 10250$ , ie Total Increase or Add back to the Operating activities 65500$.

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