Question

In 1993, Novak Company completed the construction of a building at a cost of $2,500,000 and first occupied it in January 1994. It was estimated that the building will have a useful life of 40 years and a salvage value of $76,000 at the end of that time.

Early in 2004, 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 2022, it is determined that the probable life of the building and addition will extend to the end of 2053, or 20 years beyond the original estimate.

Required:
a. Using the straight-line method, compute the annual depreciation that would have been charged from 1994 through 2003.
b. Compute the annual depreciation that would have been charged from 2004 through 2022.

Answer 1

A. $60,600

B. $80,600

Step-by-step explanation:

Depreciation expense for the year can be calculated as follows

Requirement A

Cost =2,500,000

Less: Salvage value =76,000

Useful life = 40 years

Annual depreciation from 1994 through 2003

Depreciation expense = (cost - salvage value ) / useful life

Depreciation expense = (2,500,000 - 76,000) / 40

Depreciation expense = $60,600 per year

Requirement B

Cost = 2,500,000

Add: Addition = 625,000

Total cost = 3,125,000

Less: Accumulated depreciation = 606,000

Book value (3,125,000 - 606,000) =2519000

Less: Salvage value( 76000+25000 ) = 101,000

Useful life = 30 years

Annual depreciation = (cost - salvage value ) / useful life

Annual depreciation = (2519000 - 101000) / 30

Annual depreciation = $80,600