Question

On March 31, 2016, Susquehanna Insurance purchased an office building for $10,200,000. Based on their relative fair values, one-third of the purchase price was allocated to the land and two-thirds to the building. Furniture and fixtures were purchased separately from office equipment on the same date for $1,300,000 and $800,000, respectively. The company uses the straight-line method to depreciate its buildings and the double-declining-balance method to depreciate all other depreciable assets. The estimated useful lives and residual values of these assets are as follows:
Service Life Residual value
Building 25 5% of cost
Furniture and fixtures 10 5% of cost
Office equipment 5 $40,000
Calculate depreciation for 2016 and 2017.

Answer 1

Answer:

2016 = $628,800

2017 = $903,000

Explanation:

Step 1 : Determine the Cost of the Assets

Land = 1/3 x $10,200,000 = $3,400,000

Buildings = 2/3 x $10,200,000 = $6,800,000

Furniture and fixtures = $1,300,000

Office equipment = $800,000

Step 2 : Determine the Depreciation expenses for individual assets

Land

Land is not depreciated we call it a non-depreciable asset. Hence no depreciation charge for this asset.

Buildings

Straight line method is used to depreciate Buildings. Straight line method charges a fixed amount of depreciation.

Depreciation Expense = (Cost - Residual Value) ÷ Useful life

Annual depreciation = ($6,800,000 - $340,000) ÷ 25 = $258,400

2016 :

Machine is only available for use from April to December, hence 9 months depreciation not full year depreciation.

Depreciation expense = $258,400 x 9/12 = $193,800

2017 :

A full year`s depreciation can be charged

Depreciation expense = $258,400

Furniture and fixtures

The double-declining-balance method is being used.

Deprecation expense = 2 x SLDP x BVSLDP

where,

SLDP = 100 ÷ 10 = 10%

2016 :

Annual Depreciation expense = 2 x $1,300,000 x 10% = $260,000

Allow for only 9 months depreciation, hence depreciation expense will be :

Depreciation expense = $260,000 x 9/12 = $195,000

2017 :

Provide for a full year`s depreciation.

Annual Depreciation expense = 2 x ($1,300,000 - $195,000) x 10% = $221,000

Office equipment

The double-declining-balance method is being used.

Deprecation expense = 2 x SLDP x BVSLDP

where,

SLDP = 100 ÷ 5 = 20%

2016 :

Annual Depreciation expense = 2 x $800,000 x 20% = $320,000

Allow for only 9 months depreciation, hence depreciation expense will be :

Depreciation expense = $320,000 x 9/12 = $240,000

2017 :

Provide for a full year`s depreciation.

Annual Depreciation expense = 2 x ($1,300,000 - $240,000) x 20% = $424,000

Step 3 ; Calculate Total Depreciation

2016 :

Depreciation expense = $193,800 + $195,000 + $240,000 = $628,800

2017 :

Depreciation expense = $258,400 + $221,000 + $424,000 = $903,000