If residual value is higher than expected at lease end, what is a likely effect on depreciation?

If residual value is higher than expected at lease end, what is a likely effect on depreciation?

• A. It may require adjusting depreciation expense downward.
• B. It would necessitate increasing interest rates mid-term.
• C. It has no effect on depreciation calculations.
• D. It triggers immediate lease termination.

Answer: (A)

Depreciation is based on the amount of an asset that will be consumed over the lease term, which is the asset cost minus the expected residual value at the end. When the residual value is higher than originally estimated, the amount you have to depreciate (the depreciable base) is smaller. Since depreciation expense is allocated across the lease term from that base, a higher actual residual reduces the depreciation you recognize in future periods. In practice, you adjust the depreciation schedule prospectively to reflect the higher end value, lowering future depreciation accordingly. This change has no direct effect on interest calculations, and it doesn’t trigger lease termination, so the best answer describes the downward adjustment to depreciation.

Depreciation is based on the amount of an asset that will be consumed over the lease term, which is the asset cost minus the expected residual value at the end. When the residual value is higher than originally estimated, the amount you have to depreciate (the depreciable base) is smaller. Since depreciation expense is allocated across the lease term from that base, a higher actual residual reduces the depreciation you recognize in future periods. In practice, you adjust the depreciation schedule prospectively to reflect the higher end value, lowering future depreciation accordingly. This change has no direct effect on interest calculations, and it doesn’t trigger lease termination, so the best answer describes the downward adjustment to depreciation.