Question

E11.12 (LO 1, 2) (Depreciation Computation—Addition, Change in Estimate) In 1993, Herman Moore Company completed the construction of a building at a cost of $2,000,000 and first occupied it in January 1994. It was estimated that the building will have a useful life of 40 years and a salvage value of $60,000 at the end of that time.

Early in 2004, an addition to the building was constructed at a cost of $500,000. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years, and that the addition would have a life of 30 years and a salvage value of $20,000.

In 2022, it is determined that the probable life of the building and addition will extend to the end of 2053, or 20 years beyond the original estimate.

Instructions

a.   Using the straight-line method, compute the annual depreciation that would have been charged from 1994 through 2003.

b.   Compute the annual depreciation that would have been charged from 2004 through 2021.

c.   Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2022.

d.   Compute the annual depreciation to be charged, beginning with 2022.

Answer 1

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Ans: (a) Computation of annual depreciation from 1994 to 2003 using straight line method: (i) Cost of the building: $2,000,000 (ii) Useful life: 40 years (iii) Salvage value: $60,000 (iv) Depreciation method: Straight-line Annual Depreciation: ($2,000,000-60,000)/40 years = $48,500 (b) Computation of annual depreciation from 2004 to 2021: $48,500 (i) Annual depreciation in (a): (ii) Annual depreciation of additional building: (w.n-1) Annual depreciation 2004 to 2021: $16,000 $64,500 W.Note-1: Computation of annual depreciation of additional building: Cost of additional building: $500,000 Useful life: 30 years Salvage value: $20,000 Depreciation method: Straight-line Annual depreciation of additional building: ($500,000-20,000)/30 years = $16,000 (c) No-entries required for the year 2022.

(d) Computation of annual depreciation to be charged, begenning with 2022: (i) Annual depreciation of original building: (W.N-2) (i) Annual depreciation of additional building: (W.N-3) Annual depreciation from 2022: $18,188 $6,000 $24,188 W.Note-2: Computation of annual depreciation of original building from 2022: Years depreciated: (1994 to 2021) 28 years Depreciated amount ($48,500 X 28) $1,358,000 Remaining value ($2,000,000-1,358,000) $642,000 Remaining useful life (2022 to 2053) 32 years Salvage value: $60,000 Annual depreciation is: ($642,000-60,000)/32 years = $18,188 W.Note-3: Computation of annual depreciation of additional building from 2022: Years depreciated: (2004 to 2021) 18 years Depreciated amount ($16,000 X 18) $288,000 Remaining value ($500,000-2,88,000) $212,000 Remaining useful life (2022 to 2053) 32 years Salvage value: $20,000 Annual depreciation is: ($212,000-20,000)/32 years = $6,000

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