Partial Year Depreciation and Change in Estimates. CPA Exam

In this video, we explain partial year depreciation and change in estimates.

Partial Year Depreciation

Partial year depreciation occurs when an asset is acquired, used, or disposed of for only part of a year. In this case, depreciation must be prorated to reflect the time the asset was in use.

Methods for Calculating Partial Year Depreciation

1. Straight-Line Method
The straight-line method evenly allocates depreciation over the useful life of an asset. For partial year depreciation, the annual expense is adjusted based on the time the asset was in use.

Formula:
Annual Depreciation= Cost - Salvage Value \ Useful Life

To calculate partial year depreciation:
Partial Depreciation = Annual Depreciation x Months in Use\12

Example:
A machine costs $50,000, has a salvage value of $5,000, and a 10-year life. If purchased on July 1 (6 months of use):

1. Annual Depreciation:
50,000 - 5,000\10 = 4,500

2. Partial Depreciation:
4,500 x6\12 = 2,250

2. Declining Balance Method
In this method, depreciation is calculated by applying a fixed rate to the declining book value of the asset. Partial year depreciation is prorated based on the time the asset was used.

Formula:

Depreciation = Book Value x Rate

To calculate partial year depreciation:
Partial Depreciation = Depreciation x Months in Use\12

Example:
Equipment costs $40,000 with a useful life of 5 years. Using the double declining method (40% rate), and purchased on April 1 (9 months of use):
1. Annual Depreciation:
40,000 x40% = 16,000

2. Partial Depreciation:
16,000 x9\12 = 12,000

Half-Year Convention
The half-year convention simplifies partial year depreciation by assuming all assets are acquired or disposed of at mid-year. Companies record six months of depreciation regardless of the actual date.

- In the first and final year, six months of depreciation is recognized.

Example:
A machine with an annual depreciation of $4,500 would record $2,250 in the first year using the half-year convention, regardless of the purchase month.

Journal Entries for Partial Year Depreciation
To record partial year depreciation, companies adjust the depreciation expense and accumulated depreciation.

Example:
For a machine with partial depreciation of $2,250:
- Journal Entry:
- Debit: Depreciation Expense $2,250
- Credit: Accumulated Depreciation $2,250

Disposal of Assets
When an asset is disposed of partway through a year, partial year depreciation must be calculated up to the disposal date.

Example:
If an asset is disposed of on October 31, depreciation is calculated for 10 months (January–October).

Conclusion

Partial year depreciation ensures the proper allocation of depreciation for the time an asset was in use. Whether using the straight-line or declining balance method, the expense is prorated based on the months the asset was in service. The half-year convention simplifies calculations but may not reflect actual usage. Proper handling of partial year depreciation is essential for accurate financial reporting.

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