Question

In 1993, Skysong Company completed the construction of a building at a cost of $2,120,000 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 $64,000 at the end of that time. Early in 2004, an addition to the building was constructed at a cost of $530,000. 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 $21,200. 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.

Compute the annual depreciation to be charged, beginning with 2022. (Round answer to 0 decimal places, e.g. 45,892.)

Annual depreciation expense—building

Answer 1

Computation of the annual depreciation to be charged, beginning with 2022:

(i) Building:

Total useful life remaining of Building occupied from 1994 = 40 years - 28 years* used life = 12 years

*28 years = 7 years from 1994 through 2000 + 21 years from 2001 through 2021

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

Now, new useful life of Building = 12 years + 20 years = 32 years

Annual depreciation of Building, beginning with 2022

= [(2,120,000 - Depreciation charged until now**) - Salvage value] / 32 years

= [(2,120,000 - 1,439,200) - 64,000] / 32yrs

= 616,800 / 32

= $19,275 per year

**Depreciation charged until now = [(2,120,000 - 64,000)/40] x 28yrs = $1,439,200

(ii) Addition to the Building

Total useful life remaining of Addition to the Building = 30 years - 18 years (from 2004 through 2021) used life = 12 years

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

Now, new useful life of Addition to the Buiilding = 12 years + 20 years = 32 years

Annual depreciation of Addition to the Building, beginning with 2022

= [(530,000 - Depreciation charged until now***) - Salvage value] / 32 years

= [(530,000 - 305,280) - 21,200] / 32yrs

= 203,520 / 32

= $6,360 per year

***Depreciation charged until now = [(530,000 - 21,200)/30] x 18yrs = $305,280

Annual depreciation to be charged, beginning with 2022 = $19,275 + $6,360 = $25,635 per year.