Assume that a company buys land with a building on it for $1,500,000. At the tim
ID: 2346861 • Letter: A
Question
Assume that a company buys land with a building on it for $1,500,000. At the time of purchase the company planned to tear the old building down and build a new building. The cost to tear down and dispose of the old building was $150,000 and they sold some material for $25,000. The cost to build the new building was $5,500,000 and the cost to grade the lot and landscape was $600,000. It is expected the life of the building is 25-40 years with a salvage value of $2,000,000 to $3,000,000.2. Imagine that this company came to you before undertaking this project and presented a proposal outlining the information provided above. What problems or concerns would you have raised for the company to consider?
Explanation / Answer
buys land with a building on it for $1,500,000. The cost to tear down and dispose of the old building was $150,000 The cost to build the new building was $5,500,000 and the cost to grade the lot and landscape was $600,000. ****therefore cost of fixed asset=$1,500,000+$150,000+ $5,500,000+ $600,000. they sold some material for $25,000. salvage value of $2,000,000 to $3,000,000. life of the building is 25-40 years(useful life) *** residual value = $2,000,000 to $3,000,000. annual depriciation expense=cost of fixed asset-residual value /(useful life in years) Depreciation Depreciation is the process of allocating the depreciable cost of a long-lived asset, except for land which is never depreciated, to expense over the asset's estimated service life. Depreciable cost includes all costs necessary to acquire an asset and make it ready for use minus the asset's expected salvage value, which is the asset's worth at the end of its service life, usually the amount of time the asset is expected to be used in the business. For example, if a truck costs $30,000, has an expected salvage value of $6,000, and has an estimated service life of sixty months, then $24,000 is allocated to expense at a rate of $400 each month ($24,000 ÷ 60 = $400). This method of calculating depreciation expense, called straight-line depreciation, is the simplest and most widely used method for financial reporting purposes. Some accountants treat depreciation as a special type of prepaid expense because the adjusting entries have the same effect on the accounts. Accounting records that do not include adjusting entries for depreciation expense overstate assets and net income and understate expenses. Nevertheless, most accountants consider depreciation to be a distinct type of adjustment because of the special account structure used to report depreciation expense on the balance sheet. Since the original cost of a long-lived asset should always be readily identifiable, a different type of balance-sheet account, called a contra-asset account, is used to record depreciation expense. Increases and normal balances appear on the credit side of a contraasset account. The net book value of long-lived assets is found by subtracting the contra-asset account's credit balance from the corresponding asset account's debit balance. Do not confuse book value with market value. Book value is the portion of the asset's cost that has not been written off to expense. Market value is the price some-one would pay for the asset. These two values are usually different
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