Assume that a company buys land with a building on it for $1,500,000. At the tim

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.

Discussion Questions:
If management desired the smallest depreciation possible, what recommendation would you make? Support your recommendation by detailed calculations.

Explanation / Answer

Ok let's see. $1,500,000 + $150,000(The cost to tear down) - $25,000 (material) + $5,500,000 + $600,000 = $7,725,000 Total cost $7,725,000 The most they could get for selling it is $2,000,000 to $3,000,000. In order to get the most money $3,000,000, and have the smallest depreciation possible management needs to sell the building as soon as possible in the newest possible form, and not a worn down building needing repairs. Hope this helped, best of luck.

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