26. McDonald Company acquired machinery on January 1, 2015 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2020, McDonald estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by McDonald? A) By setting future annual depreciation equal to one-sixth of the book value on January 1, 2020 B) By continuing to depreciate the machinery over the original fifteen year life C) As the cumulative effect of a change in accounting principle in 2020 D) As a prior period adjustment
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
26. McDonald Company acquired machinery on January 1, 2015 which it
A) By setting future annual depreciation equal to one-sixth of the book value on January 1, 2020
B) By continuing to depreciate the machinery over the original fifteen year life
C) As the cumulative effect of a change in accounting principle in 2020
D) As a prior period adjustment
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