When a business revises how long an asset will last, or what it will be worth at the end, the depreciation charge changes from now on. The years already recorded are left as they were. A good answer shows the new charge using the carrying amount and says what that does to profit.
This builds on straight-line depreciation and the idea of carrying amount. It closes the lessons in the depreciation and asset disposal module.
What changes, and what stays the same?
Depreciation depends on estimates: the useful life, the residual value and, for the reducing-balance method, the rate. These are judgements, not facts. When the business learns something new, it may revise one of them.
The accounting response is practical:
- Leave past years alone. They used the most reliable information available at the time.
- Take the carrying amount now. This is cost minus accumulated depreciation to date.
- Subtract any revised residual value, if the question gives one.
- Divide by the revised remaining life to find the new annual charge.
- State the effect on profit. A lower charge raises profit and a higher charge lowers it, other things equal.
The words “without inventing a policy” matter. If the question does not tell you to restate earlier years or to make a one-off catch-up entry, do not create one. State a simple assumption and show your working.
Worked example
Tanjong Print Studio buys a press for RM 30,000. It uses straight-line depreciation over 5 years with no residual value.
At the end of Year 2, after the Year 2 charge, the business revises the total useful life to 6 years, so 4 years remain. Find the new annual charge and the effect on profit.
Step 1, original charge: 30,000 ÷ 5 = RM 6,000 a year.
Step 2, accumulated depreciation after 2 years: 6,000 × 2 = RM 12,000.
Step 3, carrying amount now: 30,000 − 12,000 = RM 18,000.
Step 4, remaining life: 6 − 2 = 4 years.
Step 5, new annual charge: 18,000 ÷ 4 = RM 4,500.
Step 6, effect on profit: the charge falls from 6,000 to 4,500, so each year’s profit is RM 1,500 higher than it would have been.
Step 7, check by following the carrying amount: after 4 more years at 4,500, depreciation is 4 × 4,500 = 18,000. Total depreciation over the life is 12,000 + 18,000 = 30,000, which equals the cost, so the carrying amount ends at zero as intended.
Earlier years are unchanged: Years 1 and 2 stay at RM 6,000 each.
The mistake to watch for
A common slip is to divide the original cost by the new remaining life and ignore the depreciation already charged.
Mistaken answer: the press has 4 years left, so the new charge is 30,000 ÷ 4 = RM 7,500.
This spreads the whole cost again, even though RM 12,000 has already been charged. Over the full life, depreciation would then total 12,000 + 30,000 = RM 42,000, which is more than the cost.
The correction is to start from the carrying amount, not the cost. A second slip is to say the earlier years were “wrong” and recalculate them. A change in estimate does not make earlier years wrong, so unless the question instructs otherwise, leave them as recorded.
How should you write the explanation?
In a written answer, keep it short and tied to figures. For the example, you could write:
“The useful life was revised, so depreciation from Year 3 is based on the carrying amount of RM 18,000 over the remaining 4 years, giving RM 4,500 a year. Earlier years are not changed. Profit rises by RM 1,500 a year because the charge is lower.”
This states the cause, the method, the figure and the effect. It does not claim a rule that the question never gave.
Check yourself
Try these on paper, then open each answer.
1. A machine cost RM 20,000 with a residual value of RM 2,000 and a life of 6 years, straight-line. After 3 years, the business expects it to last 5 more years, with the residual value unchanged. Find the new annual charge.
Show answer
Original charge = (20,000 − 2,000) ÷ 6 = RM 3,000. Accumulated depreciation after 3 years = 9,000. Carrying amount = 20,000 − 9,000 = RM 11,000. New charge = (11,000 − 2,000) ÷ 5 = 9,000 ÷ 5 = RM 1,800 a year.
2. Equipment cost RM 16,000, no residual value, 4-year life, straight-line. After 1 year, the remaining life is revised to 5 years. Find the new charge and its effect on yearly profit.
Show answer
Original charge = 16,000 ÷ 4 = RM 4,000. Carrying amount after 1 year = 12,000. New charge = 12,000 ÷ 5 = RM 2,400. The charge falls by 4,000 − 2,400 = 1,600, so yearly profit is RM 1,600 higher.
3. A student wants to recalculate the depreciation for Years 1 and 2 after a life change in Year 3. Explain in two sentences why this is not the usual approach.
Show answer
The earlier years were calculated using the most reliable estimate available at the time, so they were not mistakes. The usual approach changes the charge from the current year onward, using the carrying amount and the revised remaining life, unless the question says otherwise.
Where this leads next
You now have the whole depreciation route: calculate, record, dispose and revise. Bring it together with the depreciation and disposal practice set. The percentage-base explorer helps you see the base at each stage, and the double-entry and ledger trainer lets you check the entries after a revision.
If you can follow a model answer but hesitate when a question adds a twist, our teachers can practise unfamiliar versions with you in online one-to-one Accounting tuition.