Question

At 30 June 2015, the financial statements of McMaster Ltd showed a building with a cost (net of GST) of $312,000 and accumulated depreciation of $158,000. 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 $62,000. On 1 January 2016, McMaster Ltd made structural improvements to the building costing $98,000 (net of GST). 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.

1. Calculate the number of years the building had been depreciated to 30 June 2015
2. Prepare the general journal entry to record the cost of the structural improvements on 1 January 2016
3. Prepare the general journal entry to record the building’s depreciation expense for the year ended 30 June 2016. Assume no depreciation had been recorded since 30 June 2018.

Answer 1

a
	Cost of building	$312,000
	Residual value	$62,000
	Depreciable value	$250,000
	Useful life	30 years
	Depreciation per year	$8,333
	Accumulated Depreciation	$158,000
	Depreciated year ($158,000/$8,333)	19	years
b	Entry on 1 January 2016
	Building	$98,000
	GST Receivable	$9,800
	Cash at Bank		$107,800
	(To record structural improvements to the building)
	(Note: Assume GST rate is 10%)
	Working
	Depreciation for six months to 1 January 2016	$4,167
	Carrying amount of building on 1 January 2016:	$252,000
	($312,000 - $158,000 + $98,000)
	Less: Residual value	$62,000
	Amount to be depreciated over the remaining life of 20½ years	$190,000
	Annual depreciation ($190,000 / 20.5 years)	$9,268
	Depreciation. for six months to 30 June 2016	$4,634
c	Depreciation expense –Building	$8,801
	Accumulated Depreciation –Building		$8,801
	(To record depreciation for 6 months)