Question

Novak Company constructed a building at a cost of $2,684,000 and occupied it beginning in January 1998. It was estimated at that time that its life would be 40 years, with no salvage value.

In January 2018, a new roof was installed at a cost of $366,000, and it was estimated then that the building would have a useful life of 25 years from that date. The cost of the old roof was $195,200.

1) What entry should be made in 2018 to record the replacement of the roof? (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

2) Prepare the entry in January 2018 to record the revision in the estimated life of the building, if necessary. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

3) What amount of depreciation should be charged for the year 2018?

a) Depreciation for the year 2018 (Assume the cost of the old roof is removed) b) Depreciation for the year 2018 (Assume the cost of the new roof is debited to accumulated depreciation - equipment)

Answer 1

Ans)

1)

Annual depreciation = 2,684,000 / 40 = 67,100

Loss on Disposal of Plant Assets.................................................97600

Accumulated Depreciation—Building ($195,200X 20/40) 97600 Building......................................................................................... 195,200

Building 366,000

Cash 366,000

Note: The most appropriate entry would be to remove the old roof andrecord a loss on disposal, because the cost of the old roof is given.Another alternative would be to debit Accumulated Depreciation onthe theory that the replacement extends the useful life of the building.The entry in this case would be as follows:

Accumulated Depreciation—Building ...................366,000

Cash ....................................................................... 366,000

2) No entry required

3)

a) (Assume the cost of the old roof is removed)

Building ($2,684,000 - 195,200 + 366,000)..............................2854800

Accumulated Depreciation ($67,100 X 20 – $97600) ..............(1244400)

1610400

Remaining useful life .....................................................................25 years

Depreciation—2018 ($1610400 / 25) ..........................................$ 64416

b) (Assume the cost of the new roof is debited to Accumulated Depreciation)

Book value of the building prior to the replacement ofroof $2,684000– ($67100 X 20) =.$1,342000

Cost of new roof .................................................................... 366,000

$1708000

Remaining useful life .............................................................. ÷ 25 years

Depreciation—2018($1,708000 ÷ 25) ..................................... $68,320