In 1987, Herman Moore Company completed the construction of a building at a cost
ID: 2450737 • Letter: I
Question
In 1987, Herman Moore Company completed the construction of a building at a cost of $3,000,000 and first occupied it in January 1988. It was estimated that the building will have a useful life of 40 years and a salvage value of $90,000 at the end of that time.
Early in 1998, an addition to the building was constructed at a cost of $750,000. 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 $30,000.
In 2016, it is determined that the probable life of the building and addition will extend to the end of 2047, or 20 years beyond the original estimate.
Compute the annual depreciation that would have been charged from 1998 through 2015.
Compute the annual depreciation to be charged, beginning with 2016.
Explanation / Answer
1
Calculation of the annual depreciation that would have been charged from 1998 through 2015.
Depreciation formula: (Cost - salvage value) / Estimated life
Depreciation on original building
$ 72,750
= (3000000-90000)/40
Add: Depreciation on addition to the building
$ 24,000
= (750000-30000) /30
Annual depreciation that would have been charged from 1998 through 2015.
$ 96,750
2
Calculation of annual depreciation to be charged, beginning with 2016:
Cost of Original Building
$ 3,000,000
Add: Cost of Addition to the building
$ 750,000
Less: Total Depreciation charged on Original Building till 2015 end (1988 to 2015 = for 28 years) =72750 * 28
$ (2,037,000)
Less: Total Depreciation charged on Addition to Building till 2015 end (1998 to 2015 = for 18 years) =24000 * 18
$ (432,000)
Net book Value at the end of the year 2015
$ 1,281,000
Expected remaining life (2047-2015)
32
Total Salvage values = (90000+30000)
$ 120,000
Annual depreciation to be charged, beginning with 2016 = (1281000-120000) / 32
$ 36,281
1
Calculation of the annual depreciation that would have been charged from 1998 through 2015.
Depreciation formula: (Cost - salvage value) / Estimated life
Depreciation on original building
$ 72,750
= (3000000-90000)/40
Add: Depreciation on addition to the building
$ 24,000
= (750000-30000) /30
Annual depreciation that would have been charged from 1998 through 2015.
$ 96,750
2
Calculation of annual depreciation to be charged, beginning with 2016:
Cost of Original Building
$ 3,000,000
Add: Cost of Addition to the building
$ 750,000
Less: Total Depreciation charged on Original Building till 2015 end (1988 to 2015 = for 28 years) =72750 * 28
$ (2,037,000)
Less: Total Depreciation charged on Addition to Building till 2015 end (1998 to 2015 = for 18 years) =24000 * 18
$ (432,000)
Net book Value at the end of the year 2015
$ 1,281,000
Expected remaining life (2047-2015)
32
Total Salvage values = (90000+30000)
$ 120,000
Annual depreciation to be charged, beginning with 2016 = (1281000-120000) / 32
$ 36,281