At the beginning of 2019, Robotics Inc. acquired a manufacturing facility for $12.7 million. $9.7 million...

At the beginning of 2019, Robotics Inc. acquired a manufacturing facility for $12.7 million. $9.7 million of the purchase price was allocated to the building. Depreciation for 2019 and 2020 was calculated using the straight-line method, a 25-year useful life, and a $1.7 million residual value. In 2021, the estimates of useful life and residual value were changed to 20 total years and $570,000, respectively. What is depreciation on the building for 2021?

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Expert Solution

Under the straight line method, depreciation is calculated by the following formula:

Depreciation = Cost - Residual value / Useful life

Cost = $9700000, Residual value = $1700000, useful life = 25

Depreciation = ($9700000 - $1700000) / 25

Depreciation = $8000000 / 25 = $320000

Under straight line method, depreciation remains the same for every year. So depreciation for 2019 and 2020 will be same i.e. $320000

Book value at the end of 2020 = Cost - Accumulated depreciation (i.e. depreciation for 2019 and 2020)

Book value at the and of 2020 = $9700000 - ($320000 * 2)

Book value at the end of 2020 = $9700000 - $640000 = $9060000

Calculation of revised depreciation in 2021:

From 2021 onwards, depreciation will be provided on book value as at the end of 2020 based on remaining useful life and remaining residual value:

Depreciation = Book value at the end of 2020 - Remaining residual value / Remaining Useful life

Remaining useful life = 20 - 2 = 18 years, Revised residual value = $570000, Book value = $9060000

putting the values in the above formula,

Depreciation = $9060000 - $570000) / 18

Depreciation = $8490000 / 18

Depreciation = $471666.67

So, depreciation on buildings for 2021 and thereafter will be $471666.67.

jeff jeffy answered 1 year ago

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