Question

In 1990, Ivanhoe Company completed the construction of a building at a cost of $800,000 and first occupied it in January 1991. It was estimated that the building would have a useful life of 40 years and a salvage value of $24,000 at the end of that time. Early in 2001, an addition to the building was constructed at a cost of $200,000. 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 $8,000.
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.

Required:
a. Using the straight-line method, compute the annual depreciation that would have been charged from 1991 through 2000:
b. Compute the annual depreciation that would have been charged from 2001 through 2018.
c. Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2019.

Answer 1

Answer:

(a) 19,400 dep expense for building 1991-2000 period

(b) 25,800 dep expense for building 2001-2018 period

(c) no entry required as this additional information arises during this year and wasn't available in the previous year. It wasn't a lack of sufficient information or accoutning mistake that produced.

Explanation:

(a)

cost - salvage value / useful life = depreication per year

(800,000 - 24,000) / 40 = depreciation expense per year

dep expense 19,400

(b)

building book value:

cost - accumulated depreciation

800,000 - 19,400 x 10 years = 606,000

addtional construction              200,000

total value                                 806,000

salvage value: 24,000 + 8,000= 38,000

useful life      30 years

deprecation expense betwene 2001 and 2018 related to building

(806,000 - 32,000 ) / 30 years = 25,800