 Hello, in this lecture we're going to work some shorter test type problems, problems that could be short enough to fit within a multiple choice question. What we have here is a company used straight line depreciation for an item of equipment that cost $20,300, had a salvage value of $5,600, and six year useful life. After depreciating the asset for three complete years, the salvage value was reduced to $2,030, but its total useful life remained the same. The amount of depreciation to be charged against the equipment during each of the remaining years of the useful life. So what we have here is an estimate that's made, that's what depreciation is, then halfway through there was a change to the estimate being a change to the salvage value, and the question is what do we do about that change? And the answer to that generally is we're going to make the adjustment going forward and adjust the estimate going forward, we're not going to adjust the estimate going backwards, we're not going to recalculate the stuff that happened in the past. Alright so we have the limit, so let's calculate this out, we've got the cost, let me say cost is $20,300, and then we're going to reduce the cost by the salvage value. So we're going to use the original salvage value, which is salvage value, and that was this $5,600. That's what we originally started off with at the beginning, we then adjusted that. If we subtract that out then we're going to say this equals the $20,300 cost minus the $5,600 salvage. I'm going to go ahead and underline the salvage by going to the home tab, font group and underlined, and this is the amount to be depreciated. So this is what we will depreciate over that time period leaving us with the salvage value. Now we're going to divide this by the number of years, and the years are whole years, we didn't buy it in the middle of the year, we don't have to worry about half a year type stuff, we're just going to say six entire years here, and I'm going to go ahead and underline that, home tab, font underline, and that will give us the depreciation 50 per year on a straight line method, per year on a straight line method will equal the 14.7 divided by the six years. So we would have 2,450 per year, and so what happened, where did we get left off as of the end of these three years, and then the estimate change? So after year three, we note that we had an original salvage value, which was of course this five, six, and then it changed, we had an estimate change, salvage value is going to be the 2030, so that's going to be the adjustment we need to make to the salvage value. So we're going to say this equals to five, six, minus the 2030, this is the adjustment that we need to make, and we need to make it at this point in time. So I'm going to think about it this way, we're going to think about it first, we're going to say this is the amount to be depreciated, this is the amount that we originally thought that we were going to have depreciated, I'll put that over here, and I'll put this over here a bit so it's all on the screen here. So the amount that we needed to depreciate was this 14.7, how much have we depreciated after three years, then that's going to be equal to the 2,450 times three years because it's straight line, so that's how much we have depreciated, I'm going to go to the home tab, underline that, so therefore this is what we have left, we've got the 14.7 minus the 7.350, so this is the amount that's been depreciated, and this is what is left to be depreciated, and of course it's even because we're halfway through and it's a straight line method. Now what's going to happen is we need to add to that, we have to say well we need to depreciate that 7,350, plus we need to calculate and add to it this difference, this change in the salvage value. So we're going to put in this change in the salvage value here, and say that now we need to depreciate over the next three years, this 7350 plus, this adjustment to the salvage value, this is the amount to be depreciated at this point, and then we're going to take that and we're going to divide it by the number of years, which is three is remaining, so I'm going to go ahead and underline that, home tab, font, underline, and that means for the next three years we're going to have to take this 10,920 divided by the three, and that'll give us the 3640, so we need to go forward with 3640 per year, and that will account for this change in our estimate to the salvage value, but it accounts for it for that year going forward in terms of the time in which we decided the estimate needed to be made. Next one says that a company purchased a depreciable asset on October 1st, middle of the year, keep that in mind, for one year at a cost of 172,000 in year one in October, that is, the asset is expected to have a salvage value of 16,800 at the end of five-year useful life. If the asset is depreciated on a double-declining method, the asset's book value at December 31st, year two, will be what? Okay, so now we're going to do the double-declining method, so that's the key, and note that we have it in October, that's also important, so we have the cost here that we're going to have, I'm going to do this kind of a long way and then show you the short way to calculate the double-declining rate, which of course will be the key to the double-declining balance. Questions like this will almost always ask at least year two, because year one, you know, you could take the straight line and double it, and so year two will often be asked, less likely that year five will be asked for, because that would take a lot of calculations for a small multiple-choice type question. So we have the 172,000, and no salvage value will be taken into account when we're doing this, it'll be accounted for at the end, which again you won't see a lot, because not many multiple-choice type questions will ask the end year, but it's good to know that the salvage value will have to be plugged in at the end of the year. So no salvage value when we're figuring out the rate. So other than that, it's kind of like the straight line method in that we're going to take the cost and we're going to divide it by the number of years of the useful life. So the useful life has five years, and so if we divide that out, then we're going to get the 172 divided by five years. This would be the depreciation for straight line, no salvage value, which is the confusing piece here. Now if we looked at the ratio of this, we would say okay well that's the 344 divided by the cost, meaning, and I'm going to go here, I'm going to go to the home tab, I'm going to go to the numbers and add decimals. So 20% meaning that if we thought about a five year, we would just say it would be the 172,000 times 0.2 would be straight line, and that would give us, wait let me do that one more time, 172,000 times 0.2 would give us our straight line amount. So 20% is our rate, and of course we will double that. Now just to keep this in mind that you can calculate that rate, the shortcut way of doing it is just to say okay there's five years, so I'm just going to say that's one over five, and that'll give you the right rate. So if it was three years it'd be one over three, home tab numbers, and then here we go. So there's that, so then we have the double decline in rate, which of course is going to be twice that times two of that, so I'm going to underline this, home tab font underlined, so the double decline in rate is going to be 0.4, we would think. Let's see the, there we go, 0.4, and this is double decline in rate. Okay so that's what we're going to use now, so then when we start calculation we're going to say year one, year one we have the cost, let's say cost down here, 172000, and we're going to use our rate, our double declining, let's just say this equals the double declining rate, and the double declining rate is this 0.4, and therefore I'm going to add some decimals, 0.4, underline it might as well. Therefore the depreciation for year one would be the 172 times 0.4 if it had been for an entire year, but it had not been, it's only been since October, and it's including October because we bought it in October 1st, so October I'm counting it on my fingers, October, November, December, three months. So we could think about that, let's break it down to how many months are in a year, there's 12, and we could say okay well then we have this 688 divided by 12, that's monthly depreciation then of this 5733, I'm going to go ahead and underline this, and then say how many months have passed then, three months have passed, so I'm going to go ahead and underline that, and so therefore if it's this 5733 per month times three months that'll give us the 172 in the first year. Note that that also could have been calculated over here, this is how a book will normally calculate it, that we're going to take the 68800, and then we're going to say this 312 is the same as saying just 3 over 12 equals 3 over 12, and that then, that ratio is what we can multiply by and say it's this times this, and we'll get the same number, so when you look at a book problem it'll usually say 312, it might even say one fourth on that as well, so be conscious of the ratio. So this is going to be the D pre for year one, and this is going, and then I'm going to go up here and I'm going to put the book value, book year one, and the book for year one is going to equal the original cost minus the depreciation on the first year, and then we're going to work on year two, which is what they asked for, and it starts off with the book value now, that's why this is important to get that from year one, we get the book value, once we get that we're going to multiply that down times the double declining rate, which is the same as it was last time, so that's 0.4 here, so I'm going to go ahead and add the decimals, 0.40, and I'm going to go ahead and underline that, and if we multiply that out then, now we have the 154, 8 times the 40.4, and that gives us the depreciation for year two, and then the book value for year two, I'm going to pull this over, I'm going to say book value year two then, I'll put this over here, it's going to be the book value from last year minus the depreciation for this year, and we're going to pull over, this is going to be the book value for year two, and then of course we would go on to year five like that, we would go on to the next one for year three, and note what the problem could ask you, it could ask you for the depreciation at the end of year two, or it could ask you for the book value at the end of year two, what's left at the end of year two, in this case they asked for, let's see the double declining, the asset's book value, so it asks for what's left, what's the book value, and be careful of the distinction between those two when you're doing these calculations.