E11-12 (Depreciation Computation- Addition, Change in Estimate) In 1987, Herman

Question

E11-12 (Depreciation Computation- Addition, Change in Estimate) In 1987, Herman Moore Company completed the construction of a building at a cost of $2,000,000 and first occupied it in January 1988. It was estimated that the building will have a useful life of 40 years and a salvage value of $60,000 at the end of that time. Early in 1998, an addition to the building was constructed at a cost of $500,000. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an addition 30 years, and that the addition would have a life of 30 years and a salvage value of $20,000. In 2016, it is determined that the probable life of the building and addition will extend to the end of 2047, or 20 years beyond the original estimate. a. using the straight-line method, compute the annual depreciation that would have been charged from 1988 and through 1997. b. Compute the annual depreciation that would have been charged from 1998 through 2015. c. Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2016. d. Compute the annual depreciation to be charged, beginning with 2016.

Explanation / Answer

Herman Moore Company a Annual depreciation to be charged from 1988 through 1997 A Cost of the Building $          20,00,000 B Salavage value $          60,000.00 C Depreciatiable amount (A-B) $    19,40,000.00 D useful life (years) 40 E Depreciation per annum ( C/D) $          48,500.00 b Annual depreciation that would have been charged from 1998 through 2015 A Cost of Additions to the building $            5,00,000 B Salavage value $                20,000 C Depreciable amount (A-B) $            4,80,000 D useful life (years) 30 E Depreciation per annum ( C/D) $                16,000 Total Depreciation per annum (48500 + 16000) $                64,500 c There is no requirement to adjust the account balance because a change in the estimate of useful life of an asset is a change in accounting estimate and not a change in accounting policy. Accordingly, the written down value of the asset at the beginning of 2016 has to be depreciated over the remaining useful life of the asset as revised. d Annual depreciation to be charged , beginning with 2016 Original asset Cost of Original Asset $    20,00,000.00 Depreciated years -from 1988 to 2015 28 Accumulated Depreciation from 1988 to 2015 (48500 x 28) $    13,58,000.00 Written down value at the beginning of 2016 $      6,42,000.00 Revised useful life 60 Remaining useful life (60-28) 32 Depreciable amount after salvage value (642000-60000) $      5,82,000.00 Depreciation per annum from 2016 for the remaining years $          18,187.50 Additions Cost of additions $      5,00,000.00 Depreciated years- from 1998 to 2015 18 Accumulated depreciation-from 1998 to 2015 (16000 x 18) $      2,88,000.00 Written down value at the beginning of 2016 $      2,12,000.00 Revised useful life 50 Remaining useful life (50-18) 32 Depreciable amount after salvage value (212000-20000) $      1,92,000.00 Depreciation per annum from 2016 for the remaining years $            6,000.00 Total Depreciation for remaining years $          24,187.50

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