Question

In: Accounting

A building with a cost of $225,000 has an estimated residual value of $45,000, has an...

A building with a cost of $225,000 has an estimated residual value of $45,000, has an estimated useful life of 9 years, and is depreciated by the straight-line method.

a. What is the amount of the annual depreciation?
$

b. What is the book value at the end of the fifth year of use?
$

c. If at the start of the sixth year it is estimated that the remaining life is 5 years and that the residual value is $10,000, what is the depreciation expense for each of the remaining 5 years?
$

Solutions

Expert Solution

Solution :

a.Amount of annual Depreciation :

The formula for calculation of the annual depreciation as per straight line method of depreciation is

Annual depreciation = ( Cost of the asset – Estimated Residual Value ) / Estimated useful life  

As per the information given in the question we have

Cost of the asset = $ 225,000 ; Estimated Residual Value = $ 45,000 ;

Estimated useful life  = 9 years

Applying the above information in the formula we have

= ( $ 225,000 - $ 45,000 ) / 9

= $ 180,000 / 9 = $ 20,000

Thus the Annual depreciation as per the straight line method is = $ 20,000

b. Book value at the end of the fifth year of use:

The Book value at the end of the fifth year of use is calculated as follows

= Cost of the asset – ( Annual Depreciation * No. of years of use )

= $ 225,000 – ( $ 20,000 * 5 )

= $ 225,000 – $ 100,000

=$ 125,000

Thus the Book value at the end of the fifth year of use = $ 125,000

c. Depreciation expense for each of the remaining 5 years after change in estimated useful life to 5 years and the residual value to $ 10,000 :

As per the information available we have

Book value at the end of fifth year of use = Book value at the beginning of sixth year

Thus the Book value at the beginning of sixth year = $ 125,000

Revised Residual Value = $ 10,000   ; Revised Estimated useful life = 5 years

Thus the annual depreciation as per the straight line method of depreciation

= ( $ 125,000 - $ 10,000 ) / 5

= $ 115,000 / 5

= $ 23,000

Thus the depreciation expense for each of the remaining 5 years = $ 23,000


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