Exercise 11-17 In 1988, Bonita Limited completed the construction of a building
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Question
Exercise 11-17
In 1988, Bonita Limited completed the construction of a building at a cost of $1.50 million; it occupied the building in January 1989. It was estimated that the building would have a useful life of 40 years and a residual value of $300,000.
Early in 1999, an addition to the building was constructed at a cost of $550,000. At that time, no changes were expected in its useful life, but the residual value with the addition was estimated to increase by $100,000. The addition would not be of economic use to the company beyond the life of the original building.
In 2017, as a result of a thorough review of its depreciation policies, company management determined that the building’s original useful life should have been estimated at 30 years. The neighbourhood where the building is has been going through a renewal, with older buildings being torn down and new ones being built. Because of this, it is now expected that the company’s building and addition are unlikely to have any residual value at the end of the 30-year period. Bonita Limited follows IFRS for its financial statements.
Using the straight-line method, calculate the annual depreciation that was charged from 1989 through 1998.
SHOW LIST OF ACCOUNTS
Calculate the annual depreciation that was charged from 1999 through 2016.
SHOW LIST OF ACCOUNTS
Prepare the entry, if necessary, to adjust the account balances because the estimated useful life was revised in 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Credit
SHOW LIST OF ACCOUNTS
Calculate the annual depreciation to be charged beginning with 2017.
SHOW LIST OF ACCOUNTS
Account Titles and Explanation
Debit
Credit
SHOW LIST OF ACCOUNTS
Exercise 11-17
In 1988, Bonita Limited completed the construction of a building at a cost of $1.50 million; it occupied the building in January 1989. It was estimated that the building would have a useful life of 40 years and a residual value of $300,000.
Early in 1999, an addition to the building was constructed at a cost of $550,000. At that time, no changes were expected in its useful life, but the residual value with the addition was estimated to increase by $100,000. The addition would not be of economic use to the company beyond the life of the original building.
In 2017, as a result of a thorough review of its depreciation policies, company management determined that the building’s original useful life should have been estimated at 30 years. The neighbourhood where the building is has been going through a renewal, with older buildings being torn down and new ones being built. Because of this, it is now expected that the company’s building and addition are unlikely to have any residual value at the end of the 30-year period. Bonita Limited follows IFRS for its financial statements.
Explanation / Answer
Bonita Limited
1988:
Building Cost = $15,00,000
Useful Life = 40 Years
Residual Value=$300,000
Straight line method:
= (Purchase Cost- Salvage Value)/ Useful Life
=(15,00,000-300,000)/40*10
= $ 300,000
Depreciation per year= 300,000/10 =$30,000/ year
Since the addition of $550,000 will not result in economic use to the company beyond the life of the original building, the cost of $550,000 should be expensed of.
Annual Depreciation for 1999 to 2016 is = $30,000/ year
2017:
Useful Life: 30 yrs
Residual Value : Nil
Account Titles & explanation
Debit
Credit
No Entry
0
No entry
0
Depreciation charged from 1989 to 2016= $30,000*28
= $840,000
Depreciation from 2017= (1,500,000 – 840,000)/30*2
= $ 660,000
Annual Depreciation= $660,000/2
= $330,000
Account Titles & explanation
Debit
Credit
No Entry
0
No entry
0
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