On March 31, 2016, Susquehanna Insurance purchased an office building for $12,00

Question

On March 31, 2016, Susquehanna Insurance purchased an office building for $12,000,000. 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 $1,200,000 and $700,000, 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:

On March 31, 2016, Susquehanna Insurance purchased an office building for $12,000,000. 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 $1,200,000 and $700,000, 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:

Explanation / Answer

Depreciation on building = (Cost of building - Residual vale)/Useful life of asset

Cost of building = 2/3 of $1200000

= $800000

Residual value = 10% of 800000 = $80000

Depreciation = (800000-80000)/30

= $24000

Depreciation on building for the FY 16 & 17 is $24000 each

Depreciation on furniture as per straight line method = (1200000-120000)/10

= $108000

Depreciation rate = 108000/1200000*100 = 9%

So depreciation rate as per declining balance methos = 9% * 2

= 18%

So depreciation on furniture & fixtures:

For 2016 = $1200000*18% = 216000

For 2017 = ($1200000 - $216000) * 18% = $177120

In the same way Depreciation on office equipment(straight line) = ($700000-$30000)/5

= $134000

Rate of depreciation = 134000/700000 * 100

= 19.14%

As per declining balance method., rateof depreciation = 19.14% * 2

= 38.28%

So depreciation on office equipment :

for 2016 = $700000 * 38.28%

= $267960

For 2017 = ($700000 - $267960) * 38.28%

= $165385

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