Indicate how each event affects the elements of the financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. Increase = IDecrease = DNo Effect = NA(Note that "No Effect" means that the event does not effect that element of the financial statements or that the event causes an increase in that element that is offset by a decrease in that same element.) An asset purchased for $24,000 with a $6,000 salvage value and a 5-year life has been depreciated using the straight-line method for two years. At the beginning of Year 3, the useful life of the asset was revised to 4 years with no change in salvage value. Show how the revision of depreciation expense in the third year of the asset's life will affect the

Question

financial statements in year 3 (compared to the financial statements if the revision in estimate had not been made).AssetsLiabilitiesStk. EquityRevenuesExpensesNetStmt. of ?IncomeCash Flows???????

What will be an ideal response?

Answer 1

(D) (NA) (D) (NA) (I) (D) (NA)
Shortening the estimated useful life to two remaining years, compared to three, will increase depreciation expense. The increase in depreciation expense decreases assets (by increasing accumulated depreciation, a contra asset account) and stockholders' equity (retained earnings). It increases expenses (depreciation expense), which decreases net income. The revision does not affect the statement of cash flows.