Question

In its first year of business, Sweet Acacia purchased land, a building, and equipment on March 5, 2020, for $648,000 in total. The land was valued at $280,235, the building at $334,915, and the equipment at $68,350. Additional information on the depreciable assets follows:

Asset	Residual Value		Useful Life in Years		Depreciation Method
Building	$24,720		60		Straight-line
Equipment	7,000		8		Double diminishing-balance

Allocate the purchase cost of the land, building, and equipment to each of the assets.

Land		$
Building		$
Equipment		$

Sweet Acacia has a December 31 fiscal year end and is trying to decide how to calculate depreciation for assets purchased during the year.

Calculate depreciation expense for the building and equipment for 2020 and 2021 assuming depreciation is calculated to the nearest month. (Round answers to 0 decimal places, e.g. 5,275.)

	2020		2021
Building	$		$
Equipment	$		$

Sweet Acacia has a December 31 fiscal year end and is trying to decide how to calculate depreciation for assets purchased during the year.

Calculate depreciation expense for the building and equipment for 2020 and 2021 assuming a half-year's depreciation is recorded in the year of acquisition. (Round answers to 0 decimal places, e.g. 5,275.)

	2020		2021
Building	$		$
Equipment	$		$

Answer 1

A)

When the assets are purchased in lumpsum basis then the cost of the assets to be allocated bassed on the ratio of fair value of the assets.

Here the ratio of the fair value for land, building and equipment is as follows:

The fair value total = $ 280235 + 334915 + 68350 = $ 683500.

Thus % of Land = 280235 / 683500 = 41%

Thus % of Building = 334915 / 683500 = 49%

Thus % of Equipment = 68350 / 683500 = 10%

Hence the Allocation of Purchase cost of $ 648000 in the assets are as follows:

1. land = $648000 * 41% = $ 265680.

2. Building = $ 648000 * 49% = $ 317520

3. Equipment = $ 648000 * 10% = $ 64800.

B)

a) For Building: The depreciation method is straight line depreciation = (Cost - Salvage value) / useful life.

Here cost as calculated above = $ 317520 and salvage value =$ 24720 given and useful life = 60 years.

Thus Depreciation per year = ( 317520 - 24720 ) / 60 = $4880 per year.

But here the assets is purchased on march 5 2020 , and the nearest months used in year 2020 = 10 months i.e march to December. so the yearly depreciation will be charged for 10 months.

Thus Depreciation for the year 2020 = $ 4880 * 10 / 12 = $ 4067.

And the depreciation for 2021 will be for full year = $ 4880.

b) For Equipment : The depreciation method is double diminishing balance method used the double rate than depreciation and each year depreciation is cahrged on the revised value after reducing depreciation.

Depreciation Rate in straight line method = 1 / useful life = 1/ 8 = 12.5% , so for double diminishing method the depreciation rate is doubled i.e 25% which is to be charged for 10 months in 2020.

So for the first year 2020 the Depreciation = $ 64800 * 25% * 10/12 =   $13500.

For year 2021 the depreciation = revised value * Deprecaition rate , here revised value = $64800-13500 = $ 51300

For the year 2021 the depreciation = $ 51300 * 25% = $ 12825.

Depreciation Expenses
	2020	2021
Building	$4067	$4880
Equipment	$13500	$12825

C) In case the half years Depreciation is recorded in the year of acquisitiion, The depreciation will change as follows:

For Building:

The depreciation per year as calculated above = $ 4880 , now if only half year depreciation is to be recorded then the depreciation will be $ 4880 * 1/2 = $ 2440.

And for 2021 the depreciation will be same as above i.e $ 4880.

For Equipment :

The Depreciation rate is 25% under double diminishing method and the cost is = $ 64800 ,

Thus depreciation for half year for 2020= $64800 * 25% * 6/12 = $8100

and for year 2021, the depreciation will be on the value i.e $ 56700 (64800-8100) @ 25%

Thus for 2021 depreciation = $56700 * 25% = $14175.

Hence,

Depreciation Expenses
	2020	2021
Building	$ 2440	$ 4880
Equipment	$ 8100	$ 14175