Exercise 11-12 In 1990, Pina Company completed the construction of a building at

Question

Exercise 11-12

In 1990, Pina Company completed the construction of a building at a cost of $2,120,000 and first occupied it in January 1991. It was estimated that the building will have a useful life of 40 years and a salvage value of $63,600 at the end of that time.

Early in 2001, an addition to the building was constructed at a cost of $530,000. 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 $21,200.

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.

Compute the annual depreciation to be charged, beginning with 2019. (Round answer to 0 decimal places, e.g. 45,892.)

Explanation / Answer

Annual depreciation expense to be charged, beginning with 2019 = $25639

Explanation & Working Note;

First of all let’s calculate depreciation from 1991 to 2019 to know exact book value of building in 2019;

Cost of the building in the beginning of 1991 = $2120000

Salvage value = $63600

Useful life = 40 years

Thus annual depreciation will be calculated as follow;

Annual depreciation ($2120000 – $63600) / 40 = $51410

As per information of the question, it is clear that an addition was made in the beginning of 2001, So let’s calculate annual depreciation on this additional building;

Cost of additional building = $530000

Salvage value = $21200

Useful life = 30 years

So annual depreciation on additional building will be calculated as follow;

($530000 - $21200) / 30 = $16960

Now let’s calculate book value of original building at the beginning of 2019;

Total number of years passed for original building (From 1991 – 2019) = 28 years

Annual depreciation on original building = $51410

Total accumulated depreciation on original building ($51410 * 28) = $1439480

So book value at the beginning of 2019 ($2120000 – $1439480) = $680520

Now let’s calculate book value additional building at the beginning of 2019;

Total number of years passed for additional building (From 2001 – 2019) = 18 years

Annual depreciation on additional building = $16960

Total accumulated depreciation on additional building ($16960 * 18) = $305280

So book value at the beginning of 2019 ($530000 – $305280) = $224720

Now let’s calculate annual depreciation expense to be charged, beginning with 2019;

Book value of original building at the beginning of 2019

$680520

Salvage value

$63600

Useful life (From 2019 to 2050) including both years

32 year

So annual depreciation ($680520 – $63600) / 32

$19278.75

Book value of additional building at the beginning of 2019

$224720

Salvage value

$21200

Useful life (From 2019 to 2050) including both years

32 years

So annual depreciation ($224720 – $21200) / 32

$6360

Total annual depreciation expense ($19278.75 + $6360)

$25638.75 or

$25639

Book value of original building at the beginning of 2019

$680520

Salvage value

$63600

Useful life (From 2019 to 2050) including both years

32 year

So annual depreciation ($680520 – $63600) / 32

$19278.75

Book value of additional building at the beginning of 2019

$224720

Salvage value

$21200

Useful life (From 2019 to 2050) including both years

32 years

So annual depreciation ($224720 – $21200) / 32

$6360

Total annual depreciation expense ($19278.75 + $6360)

$25638.75 or

$25639

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