Question

Mooney Ltd. completed the construction of an office building for £2,400,000 on December 31, 2019. The company estimated that the building would have a residual value of £0 and a useful life of 40 years. A more detailed review of the expenditures related to the building indicates that £300,000 of the total cost was used for personal property and £180,000 for land improvements. The personal property has a depreciable life of 5 years and land improvements have a depreciable life of 10 years.

Instructions

a. Compute depreciation expense for 2020 using component depreciation and the straight‐line method.

b. assume a yearly accounting period ending on 31 May 2020. Prepare the adjusting journal entry for depreciation on that date.

c. Prior to the IFRS requirement to depreciate components separately, all of the £2,400,000 may well have been depreciated using the useful life and residual value of the building. Calculate the depreciation expense for the calendar year 2020 under this scenario. Compare this with what you calculated for Instruction a). If management were opportunistic, would they have preferred the result just calculated or the result in a)? Explain why.

Answer 1

	Calculation of Depreciation		Amount	Life years
1		Total Builing		2400000	40
				Amount	Life years
		Office Building		24,00,000	40
		Personal Purpose		-3,00,000	5
		land Improvement		-1,80,000	10
		Remainig Building		19,20,000
		Useful Life DEP/Straight Line				(Amount- Residual value)/Life
	a	Depreciation Lum Sum	60000
	Note	Assume it is depreciated under Same head and clubbed
	b	Using Component Depreciation
		Remaining Office Building	48,000
		Personal Purpose		60000
		land Improvement		18000
				1,26,000
2	Journal Enrty
		Debit to the income statement account Depreciation Expense	60,000
		Credit to the balance sheet account Accumulated Depreciation	60,000
		Debit to the income statement account Depreciation Expense	126000
		Credit to the balance sheet account Accumulated Depreciation	126000
3		Depreciation Under Is higher in Compononet Depreciation by 66000