Question

E11-13 (L01,2) (Depreciation—Replacement, Change in Estimate) Greg Maddox Company constructed a building at a cost of $2,200,000 and occupied it beginning in January 1998. It was estimated at that time that its life would be 40 years, with no salvage value.
In January 2018, a new roof was installed at a cost of $300,000, and it was estimated then that the building would have a useful life of 25 years from that date. The cost of the old roof was $160,000.
Instructions (a) What amount of depreciation should have been charged annually from the years 1998 to 2017? (Assume straight-line depreciation.)
(b) What entry should be made in 2018 to record the replacement of the roof? (c) Prepare the entry in January 2018 to record the revision in the estimated life of the building, if necessary. (d) What amount of depreciation should be charged for the year 2018?

Answer 1

a. Depreciation = Cost of the building/ Estimated life of the asset

= $ 2,200,000/40 = $ 55,000 per year.

b. Journal entry when replacement of the roof was made

loss on disposal of asset 80,000

Depreciation on building 80,000

Building 160,000

Building 300,000

cash 300,000

c. No entry required

d. amount of depreciation for the year 2018 is

depreciation= Remaining cost of the building/ Remaining useful life of the asset

Remaining cost of the buildilng = cost of the building+ acqisiton-disposal of asset-accumulated depreciatio

cost of the building = ($ 2,220,000+ $ 300,000- $ 160,000) - $ 1,020,000

= $ 1,320,000

Remaining useful life of the asset= 25 years

depreciation to be charged = $ 1,320,000/25 years

= $ 52,800