In: Accounting
At 30 June 2013, the financial statements of Detroit Ltd showed a building with a cost of $300,000 and accumulated depreciation of $150,000. The business uses the straight-line method to depreciate the building. When acquired, the building’s useful life was estimated at 50 years with no residual value. On 1 January 2019, Detroit Ltd completed structural improvements to the building costing $93,000 and paid with cash. As a result of the improvements, the useful life of the building was changed to 50 years from the date of the improvements. No change is expected in the residual value. Ignore GST.
Required:
Solution:
The problem is related with the change/revision in useful life of fixed assets and effect of that revision on the financial statements.
Useful life revision is accounted for prospectively – The change in the estimate is reported in the current and prospective periods. In other words, previously reported statements and opening balances do not need to be adjusted to reflect the change in the useful life estimate.
When a change in the useful life is occurs, there is no need to record a journal entry. New Depreciation is recorded at the end of accounting period.
Annual Depreciation on Building till December 31, 2018
$$ |
|
Value of Asset |
$300,000 |
Less: Residual/Scrap Value |
$0 |
Depreciable Value |
$300,000 |
Estimated Useful Life of Asset (In Years) |
50 |
Annual Straight Line Depreciation Expense |
$6,000 |
Number of Years Asset Used (from 30 June 2013 to Dec 31, 2018 i.e. 5 ½ Years) |
5.5 Years |
Accumulated Depreciation for 5.5 Years (5.5*$110,000) |
$33,000 |
Plus: Accumulated Depreciation till June 30, 2013 |
$150,000 |
Total Accumulated Depreciation till Dec 31, 2018 |
$183,000 |
Carrying Value of Building as on Jan 1, 2019 = Historical Cost of Building $300,000 – Total Accumulated Depreciation till Dec 31, 2018 $183,000
= $117,000
The amount spent on fixed assets which increase the useful life or productivity of asset should be capitalized in the value of fixed assets and should be depreciation over the estimated useful life of the asset.
Carrying Value of Building as on Jan 1, 2019 |
$117,000 |
Plus: Amount Spent on Structural Improvement |
$93,000 |
Total Revised Value of Asset as on Jan 1, 2019 |
$210,000 |
Change in useful life of asset from the date of Improvement i.e. Jan 1, 2019 = 50 Years
Annual Straight Line Revised Depreciation |
|
$$ |
|
Revised Value of Asset |
$210,000 |
Less: Residual/Scrap Value |
$0 |
Depreciable Value |
$210,000 |
Estimated Useful Life of Asset (In Years) |
50 |
Annual Straight Line Depreciation Expense |
$4,200 |
Part a - Number of years the building had been depreciated to 30 June 2013
Total Accumulated Depreciation till June 30, 2013 |
$150,000 |
Divide by Annual Depreciation (as calculated above) |
$6,000 |
Number of Years the building had been depreciation till June 30, 2013 ($150,000 / 6,000) |
25 Years |
Part b - Journal entry to record the cost of the structural improvements on 1 January 2019
Date |
General Journal |
Debit |
Credit |
Jan.1, 2019 |
Building or Fixed Asset A/c |
$93,000 |
|
Cash |
$93,000 |
||
(Being structural improvement to the building is capitalized and paid) |
Part c - Journal entry to record the building’s depreciation expense for the year ended 30 June 2019. Assume no depreciation had been recorded since 30 June 2018.
It is required to be noted that on Jan 1, 2019 structural improvement on building happened and it revised the value of building to be depreciation over the revised estimated useful life of asset. So we need to record Half Year Depreciation before the structural improvement and Half Year Depreciation after the Structural Improvement.
Date |
General Journal |
Debit |
Credit |
June.30, 2019 |
Depreciation Expense (6,000*1/2 before improvement + $4,200*1/2 after improvement) |
$5,100 |
|
Accumulated Depreciation |
$5,100 |
||
(Being depreciation expenses recorded for the year ended 30 June 2019) |
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you