Exercise 11-12 In 1990, Monty Company completed the construction of a building a
ID: 2583114 • Letter: E
Question
Exercise 11-12 In 1990, Monty Company completed the construction of a building at a cost of $2,300,000 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 $69,000 at the end of that irmes Early in 2001, an addition to the building was constructed at a cost of $575,000. 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 $23,000 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. Using the straight-line method, compute the annual depreciation that would have been charged from 1991 through 2000 Annual depreciation from 1991 through 2000 SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT Compute the annual depreciation that would have been charged from 2001 through 2018. Annual depreciation from 2001 through 2018, yTExplanation / Answer
Annual depreciation from 1991 through 2000: $55,775 / yr.
Depreciable cost = $2,300,000 - $69,000 = $2,231,000
Annual depreciation = $2,231,000 / 40 years = $55,775
Annual depreciation from 2001 through 2018: $74,175 / yr.
Depreciable cost of addition to building = $575,000 - $23,000 = $552,000
Annual depreciation on addition = $552,000 / 30 years = $18,400
Total annual depreciation = $55,775 + $18,400 = $74,175
No journal entry is required to adjust the account balances because of the revision of the estimated life since change in estimated life is a revision of an accounting estimate and not an accounting error. The effect of the change in estimated life will be reported prospectively.
Annual depreciation expense-building: $27,816
On revision of estimated life, the remaining book value of building will be depreciated over its remaining revised estimated useful life.
Book value of original building in 2019 = $2,300,000 – ($55,775 x 28 years) = $2,300,000 - $1,561,700 = $738,300
Remaining revised estimated useful life = (40 – 28) + 20 = 12 + 20 = 32 years
Revised annual depreciation = ($738,300 - $69,000) / 32 years = $669,300 / 32 years = $20,915.625 = $20,916
Book value of addition to building in 2019 = $575,000 – ($18,400 x 18 years) = $575,000 - $331,200 = $243,800
Remaining revised estimated useful life = (30 – 18) + 20 = 12 + 20 = 32 years
Revised annual depreciation = ($243,800 - $23,000) / 32 years = $220,800 / 32 years = $6,900
Total depreciation = $20,916 + $6,900 = $27,816
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