Exercise 11-12 In 1990, Kingbird Company completed the construction of a buildin
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Question
Exercise 11-12
In 1990, Kingbird Company completed the construction of a building at a cost of $2,500,000 and first occupied it in January 1991. It was estimated that the building will have a useful life of 40 years and a salvage value of $75,000 at the end of that time.
Early in 2001, an addition to the building was constructed at a cost of $625,000. 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 $25,000.
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.
Account Titles and Explanation
Debit
Credit
Exercise 11-12
In 1990, Kingbird Company completed the construction of a building at a cost of $2,500,000 and first occupied it in January 1991. It was estimated that the building will have a useful life of 40 years and a salvage value of $75,000 at the end of that time.
Early in 2001, an addition to the building was constructed at a cost of $625,000. 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 $25,000.
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.
Explanation / Answer
Annual depreciation from 1991 through 2000: $60625
Depreciable cost = Cost - Salvage value = $2500000 - $75000 = $2425000
Annual depreciation = Depreciable cost/Estimated useful life = $2425000/40 years = $60625
Annual depreciation from 2001 through 2018: $80625
Depreciable cost of addition to building = Cost - Salvage value = $625000 - $25000 = $600000
Annual depreciation on addition = Depreciable cost/Estimated useful life = $600000/30 years = $20000
Total annual depreciation = $60625 + $20000 = $80625
Note: No adjustment of account balances is required for the revision in estimated useful life of the building since the revision in useful life is not an accounting error but it is a change in an accounting estimate. The remaining depreciable value will be depreciated prospectively over the remaining revised useful life of the building.
Annual depreciation expense-building: $42232
Depreciation charged upto 2018 = $606250 + $645000 = $1251250
1991 to 2000 = $60625 x 10 years = $606250
2001 to 2018 = $80625 x 8 years = $645000
Remaining depreciable value = Depreciable cost - Accumulated depreciation = ($2425000 + $600000) - $1251250 = $1773750
Remaining useful life = 60 - 18 = 42 years
Annual depreciation to be charged beginning 2019 = $1773750/42 years = $42232.14 = $42232
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