How do I account for a change in useful life or salvage value for depreciation?

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AcadiFi · Accepted Answer

A change in useful life or salvage value is treated prospectively as a change in accounting estimate. You do not restate prior years. Instead, compute the asset's carrying amount on the date of change and spread that remaining depreciable base over the revised remaining life.

Example: Silver Peak Tools buys equipment for $260,000 with an original 10-year life and $20,000 salvage value. Straight-line depreciation is $24,000 per year. After 3 years, accumulated depreciation is $72,000 and carrying amount is $188,000. New information shows the machine will be useful for only 5 more years, and salvage is revised to $8,000. The new depreciable base is $188,000 - $8,000 = $180,000, so future annual depreciation is $36,000 over the next 5 years. That higher expense affects only future periods and does not change the three years already reported.

The FAR trap is treating this like an error correction. If the original estimate was reasonable based on what management knew then, there is no prior-period adjustment and no retained earnings entry. Just update depreciation going forward from the change date. Another common trap is forgetting to use the carrying amount, not original cost, in the revised calculation. Practice more in our CPA FAR question bank.

How do I account for a change in useful life or salvage value for depreciation?

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