Question

Practice Exercise 11-2 In 1990, Carla Vista Company completed the construction of a building at a cost of $900,000 and first occupied it in January 1991. It was estimated that the building would have a useful life of 40 years and a salvage value of $27,000 at the end of that time. Early in 2001, an addition to the building was constructed at a cost of $225,000. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years, and that the addition would have a life of 30 years and a salvage value of $9,000. In 2019, it is determined that the probable life of the building and addition will extend to the end of 2050, or 20 years beyond the original estimate. Using the straight-line method, compute the annual depreciation that would have been charged each year from 1991 through 2000. Annual depreciation from 1991 through 2000 $ / yr Compute the annual depreciation that would have been charged from 2001 through 2018. Annual depreciation from 2001 through 2018 $ / yr Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2019. (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.) Account Titles and Explanation Debit Credit Compute the annual depreciation to be charged, beginning with 2019. Annual depreciation expense—building $

Answer 1

a) Cost of Building = $900,000

Useful Life = 40 yrs

Salvage Value = $27,000

Annual Depreciation Exp. from 1991 to 2000 = (Cost - Salvage Value)/Useful Life

= ($900,000 - $27,000)/40 yrs = $21,825 per year

b) Depreciation Exp for additions to Building = (Additions Cost - Salvage Value)/Useful Life

= ($225,000 - $9,000)/30 yrs = $7,200 per year

Depreciation for earlier cost of Building = $21,825

Total Depreciation from 2001 to 2018 = $21,825+$7,200 = $29,025

c) No Entry is required for 2019 for revision in estimated life.

d) Building constructed in 1991

Total years for Building Constructed in 1991 = 28 years (beginning of 1991 to end of 2018)

Total Depreciation Charged upto 2019 for Existing cost of Building = $21,825*28 yrs = $611,100

Book value at the beginning of 2019 = Cost - Total Depreciation Charged

= $900,000 - $611,100 = $288,900

Salvage Value = $27,000

New Estimated Remaining Life = 12 yrs remaining+20 yrs extended life = 32 yrs

Annual Depreciation from 2019 = ($288,900-$27,000)/32 yrs = $8,184

Additions in 2001

Total years for Building Additions in 2001 = 18 years (beginning of 2001 to end of 2018)

Total Depreciation Charged upto 2019 for Existing cost of Building = $7,200*18 yrs = $129,600

Book value at the beginning of 2019 = Cost of Additions - Total Depreciation Charged

= $225,000 - $129,600 = $95,400

Salvage Value = $9,000

New Estimated Remaining Life = 32 yrs

Annual Depreciation from 2019 = ($95,400-$9,000)/32 yrs = $2,700

Total Annual Depreciation Expense from 2019 = $8,184+$2,700 = $10,884