Question

Merton Company purchased a building on January 1, 2016, at a cost of $364,000. Merton estimated that its life would be 25 years and its residual value would be $14,000.
On January 1, 2017, the company made several expenditures related to the building. The entire building was painted and floors were refinished at a cost of $21,000. A federal agency required Merton to install additional pollution control devices in the building at a cost of $42,000. With the new devices, Merton believed it was possible to extend the life of the building by six years.

In 2018, Merton altered its corporate strategy dramatically. The company sold the building on April 1, 2018, for $392,000 in cash and relocated all operations to another state.

Required:

1. Determine the depreciation that should be on the income statement for 2016 and 2017.2. What amount of gain or loss did Merton record when it sold the building? Do not round intermediate calculations.

Answer 1

Answer:

See below.

Explanation:

Assuming straight line depreciation method.

Depreciation for 2016 would be as,

Dep Expense 2016 = 364,000 - 14,000 / 25 = $14,000/year

Depreciation for 2017,

We assume that all the costs, the refinishing and painting and pollution devices were capitalized. This brought the total value of the building to

Building = 364,000 - 14,000 + 21,000 + 42,000 = $413,000

Since we have already subtracted depreciation for 2016 the new revised life of the building is = 25 - 1 + 6 = 30 years from 2017 on wards.

Dep expense for 2017 = 413,000 - 14,000 / 30 = $13,300/year

Loss on Building when sold = Sale price - Net book value in 2018

Loss = 392,000 - (413,000 - 13,300) = $7,700

Assuming full dep in year of purchase and no in year of sale.

Hope that helps.