In: Accounting
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?
$
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