Question

The purchase price of Property and Building was of 50 million (100 single rooms and restaurants with a total of 200 seats) purchased 10 years ago. Each year, 250,000 have been recorded as depreciation cost.

• The present value of Capital Stock is 14 millions, Retained Earnings 3.5 millions, Mortgage 30 millions, Other long term loan 3 millions, Working Capital 3 millions.

• We plan a refurbishment plan over the next 3 years of 2 million a year; the planned works are quite expensive as we change the entire furniture of the bedrooms and bathrooms. Based on this, we plan to depreciate this over 20 years using the straight line method.

• We are planning as well to build a second restaurant with terrace; investment cost has been budgeted to 2 millions, to be depreciated over 10 years using the straight line method.

Based on the information above, what is the depreciation cost of refurbishment?

Answer 1

Hi

Pls see below tables:

Refurnishing of Rooms (Bedrooms and Bathrooms)	Calculation	Year 1	Year 2	Year 3
		in Millions	in Millions	in Millions
Opening value	A	-	1.90	3.71
Refurbishment plan amount	B	2.00	2.00	2.00
Depreciable amount	C= A+B	2.00	3.90	5.71
Life in years	D	20.00	20.00	20.00
Depreciation	E= C/D	0.10	0.20	0.29
Closing value	C- E	1.90	3.71	5.42
Restaurant with terrace	Calculation	Year 1	Year 2	Year 3
		in Millions	in Millions	in Millions
Opening value	A	-	1.80	1.62
investment cost has been budgeted	B	2.00	-	-
Depreciable amount	C= A+B	2.00	1.80	1.62
Life in years	D	10.00	10.00	10.00
Depreciation	E= C/D	0.20	0.18	0.16
Closing value	C- E	1.80	1.62	1.46
Depreciation cost of refurbishment		0.30	0.38	0.45
(Sum of above 2- Green highleted rows)

Explanation for Opening value calcualtion :

Opening value is nothing but the closing value of previous year. For example in Refurnishing of Rooms (Bedrooms and Bathrooms) catgory : In 1st year the closing value is 1.9 M. So this becomes the opening value for 2nd year. and in 2nd year the clsoing value is 3.71, so this becomes the opening value for 3rd year.