Question

At 30 June 2015, the financial statements of McMaster Ltd showed a building with a cost (net of GST) of $324,000 and accumulated depreciation of $164,000. The business uses the straight-line method to depreciate the building. When acquired, the building's useful life was estimated at 30 years and its residual value at $65,000. On 1 January 2016, McMaster Ltd made structural improvements to the building costing $102,000 (net of GST). Although the capacity of the building was unchanged, it is estimated that the improvements will extend the useful life of the building to 40 years, rather than the 30 years originally estimated. No change is expected in the residual value.

1. Calculate the number of years the building had been depreciated to 30 June 2015

2. Prepare the general journal entry to record the cost of the structural improvements on 1 January 2016

3. Prepare the general journal entry to record the building’s depreciation expense for the year ended 30 June 2016. Assume no depreciation had been recorded since 30 June 2018.

Answer 1

1. Depreciation => (324,000-65,000)/30 years = 8,633.33

Accumulated Depreciation => 164,000/8633.33 = 19 years.

2,3.

Jounral Entries

31st December 2015	Depreciation expense Dr (8633.33/2)	4,316.67
	To accumulated depreciation		4316.67
	(Upto 31/12/2015)
	Accumulated depreciation Dr (164,000+4316.67)	168,316.67
	To Buildings		168,316.67
	(Written back)
	Buildings Dr	102,000
	GST (ASSUMED 10%)	10,200
	To Cash		112,200
	Depriecation expense Dr	4700
	To Accumulated Depreciation		4700

Depreciation => (Opening -Accumualted depreciation +Addition -Residual value )/(Remanining Life)

Ie., [(324000-168,316.67)+102,000 - 65,000]/(20.5) = 9400 per annum.

Since we've to consider from 1/1/16 to 30/6/16 so, 9400×1/12 = 4700.