Question

Question One.
The costs incurred by Noriega Company to acquire land and construct a building
were as follows:

i.	Land	k150,000,000
ii.	Construction insurance	k3,500,000
iii.	Delinquent tax paid on the land	k 5,000,000
iv.	Building construction contract	k 220,000,000
v.	Architect Fees	k2,000,000
vi.	Street and side Walk installation	k4,000,000
vii.	Excavation Costs	k3,100,000
viii.	Property Tax on land (pro to construction)	k1,600,000
ix.	Interest cost on loan to pay contract	k2,600,000

Requirements:
a. Determine the cost of land
b. Determine the cost of the building ( 3 Marks)
c. Assuming the residue value of the building is K60,000,000 and that the
economic life is Ten years, compute Noriega LTD Company’s depreciation
expense for Year 1, Year 2, Year 3 under the following methods
i. Straight line Method
ii. Double Declining Method
iii. The Sum of Years Digit (SYD) Method ( 2 Marks)
d. At the beginning of Year 4, Noriega LTD Company incurred an additional
Cost of K10, 000,000 in order to add a new wing to the building; as a result
the salvage value of the building is increased by k5, 000,000 and also
increased the remaining life of the building by 2 years.

i. Re- Calculate the depreciation for the next two years using the straight
line method. ( 3 Marks)

Answer 1

a

COST	AMOUNT	CATEGORY OF EXPENSES
Land	150,000,000	land
Construction insurance	3,500,000	building
Delinquent tax paid on the land	5,000,000	land
Building construction contract	220,000,000	building
Architect Fees	2,000,000	building
Street and side Walk installation	4,000,000	land
Excavation Costs	3,100,000	building
Property Tax on land (pro to construction)	1,600,000	land
Interest cost on loan to pay contract	2,600,000	building

a) Cost of Land = Land+Delinquent tax paid on the land+Street and side Walk installation+Property Tax on land (pro to construction)

=150,000,000+5,000,000+4,000,000+1,600,000

=160,600,000

B) Cost of land =Construction insurance+Building construction contract+Architect Fees+Excavation Costs+Interest cost on loan to pay contract

=3,500,000+220,000,000+2,000,000+3,100,000+2,600,000

=231,200,000

C) Depreciation calculation

Cost of asset =231,200,000

Life of the Asset=10 years

Residual value=60,000,000

1) Straight line method

Depreciation = Cost of the asset- Residual value/Life of the asset

=231,200,000-60,000,000/10

=17,120,000

1st Year depreciation= 17,120,000

2nd Year depreciation=17,120,000

3rd year depreciation=17,120,000

ii)Double Declining Method

Depreciation formula =2* Straight line depreciation rate* Book value at the begining of the year

YEAR	COST AT THE BEGINNING OF THE YEAR	2*STRAIGHT LINE RATE OF DEPRECIATION* BOOK VALUE AT THE BEGINNING	CLOSING BOOK VALUE
1	231,200,000	46,240,000	184,960,000
2	184,960,000	36,992,000	147,968,000
3	147,968,000	29,593,600	118,374,400

iii) Sum of years digits method

Year	Remaining	SYD	Applicable	Annual
					1	10	10/55	0.18181818	420363.6364
					2	9	9/55	0.16363636	378327.2727
3	8	8/55	0.14545455	336290.9091
4	7	7/55	0.12727273	294254.5455
5	6	6/55	0.10909091	252218.1818
6	5	5/55	0.09090909	210181.8182
7	4	4/55	0.07272727	168145.4545
8	3	3/55	0.05454545	126109.0909
9	2	2/55	0.03636364	84072.72727
10	1	1/55	0.01818182	42036.36364
	55			2312000

D)

Cost of asset at the end of the year =231,200,000-51,360,000=179,840,000

Additional cost incurred =179,840,000+10,000,000

=189,840,000

Depreciation =189,840,000-65,000,000/9

=13,871,111

4th and 5th year depreciation=13,871,111 for each year