Question

At 30 June 2019, the financial statements of McMaster Ltd showed a building with a cost of $300 000 and accumulated depreciation of $152 000. The business uses the straight-line method to depreciate the building. When acquired, the building’s useful life was estimated at 30 years and its residual value at $60 000. On 1 January 2020, McMaster Ltd made structural improvements to the building costing $94 000. Although the capacity of the building was unchanged, it is estimated that the improvements will extend the useful life of the building to 40 years, rather than the 30 years originally estimated. No change is expected in the residual value.

Required

1. Calculate the number of years the building had been depreciated to 30 June 2019.
2. Give the general journal entry to record the cost of the structural improvements on 1 January 2020.   

c.Give the general journal entry to record the building’s depreciation expense for the year ended 30 June 2020.

Answer 1

A)

Let the no.of. years the building has been depreciated is X.

The formula for depreciation calculated under straight line method is ((Cost of the asset- residual value)/Life of the asset)*No.of completed years

Depreciation amount = ((Cost of the asset-Residual value)/Total life of the asset)*No.Of. Completed years

1,52,000 = ((3,00,000-60,000)/30)*X

1,52,000 = 8,000*X

X = 1,52,000/8,000

X = 19 years

B)

The Cost of structural improvement made as on 1st January 2020 increased the life of the asset, that will also generate the economic benefits for another 10 years for the company.

So, as per Generally accepted accounting policies the expenditure on buildings should be capitalized.

The journal entry for cost of structural improvement is

Building a/c Dr 94,000

To Bank a/c 94,000

C)

The Depreciation for 1st 6 Months (i.e up to 31st Dec 2019)

Depreciation = ((cost of the asset-Residual value)/Total life of the asset)*0.5years

Depreciation = ((3,00,000-60,000)/30)*0.5

Depreciation = 8,000*0.5

Depreciation = 4,000

(Note : Life of the asset as on 31st dec 2019 is 30 years)

The Depreciation for 2nd 6 months (i.e: from 1st jan 2020 to 30th June 2020)

Depreciation = ((Net value of the asset after reduction of total depreciation- residual value)/Remaining life of the asset)*6 months

Depreciation = ((2,38,000-60,000)/20.5)*0.5

Depreciation = 4,341.46

(Note: Net value of the asset after reduction of total depreciation = 3,94,000-1,52,000 -4,000 = 2,38,000)

Journal entry for buildings depreciation expense is

Depreciation a/c Dr 8,341.46

Accumulated Depreciation 8341.46