Question

In 1988, Pearl Limited completed the construction of a building at a cost of $1.76 million; it occupied the building in January 1989. It was estimated that the building would have a useful life of 40 years and a residual value of $400,000.

Early in 1999, an addition to the building was constructed at a cost of $760,000. At that time, no changes were expected in its useful life, but the residual value with the addition was estimated to increase by $190,000. The addition would not be of economic use to the company beyond the life of the original building.

In 2017, as a result of a thorough review of its depreciation policies, company management determined that the building’s original useful life should have been estimated at 30 years. The neighbourhood where the building is has been going through a renewal, with older buildings being torn down and new ones being built. Because of this, it is now expected that the company’s building and addition are unlikely to have any residual value at the end of the 30-year period. Pearl Limited follows IFRS for its financial statements.

Calculate the annual depreciation that was charged from 1999 through 2016.

Annual depreciation, 1999 through 2016

Answer 1

(A) Using straight-line method, calculate the annual depreciation that was charged from 1989 through 1998.

Annual depreciation, 1989 through 1998$

= ($1,760,000 - $400,000) / 40

= $ 1,360,000 / 40

= $34,000 per year.

(B)

Value of building at the beginning of the year 1999 (after depreciation) = 1,760,000 - (34,000 * 10)

= 1,420,000

Addition in building = 760,000

Total value of building = 1,420,000 + 760,000 = 2,180,000

Residual value (1989) = 400,000

Increase in Residual value = 190,000

Total Residual Value = 590,000

Useful life of building = 40 years

Time span passed (1989-1998) = 10 years

Remaining Useful life of building = 30 years

Now,

Straight Line method of Depreciation

Annual Depreciation Amount = (Fixed Asset Value - Residual Value) / Useful life of asset

= (2,180,000 - 590,000) / 30

= 1,590,000 / 30

= $53,000 per year

In the year 2017, it has come to notice that the remaining useful life of the building is 30 years. Also, the residual value is NIL. In such case, we will compute the annual depreciation with new residual value i.e. NIL and new remaining useful life of asset i.e. 30 years. The value of asset will be after depreciation is charged from the year 1989 to 2016.

However, no entry is required to make such necessary changes as there is no retrospective change nor their is change in the method of depreciation.

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