Arboretum Limited has been depreciating its production equipment on a straight- line basis over 10 years, taking a full year’s depreciation in the year of acquisition and assuming no residual value at the end of the equipment’s life. The company had invested $ 1,200,000 in the equipment at the beginning of 20X1. At the beginning of 20X4, the company decided to adjust the equipment’s total useful life from 10 years down to eight, but with an estimated residual value amounting to 5% of the equipment’s original cost rather than zero.
How should this change be reported in Arboretum’s comparative financial statements for 20X4? Determine the amount of depreciation expense to be shown for 20X4 and the comparative amount for 20X3.