Question

The following information will be used for two questions on the exam:

On January 1, 2020 Navani Corp. decided to replace the HVAC system in its manufacturing plant because the old HVAC system was no longer adequate. The building was originally purchased for $5,000,000 on January 1, 2010 and has been depreciated using the straight-line method over an estimated 20-year life with zero estimated salvage value. The book value of the old HVAC system is unknown and the new HVAC system cost $500,000. It is estimated that the replacement of the HVAC system will increase the useful life of the building by six additional years. It is not anticipated that the buildings productive output will increase from the replacement.

Which of the following statements is false?

		The building account balance immediately after the replacement will be $5,500,000.
		Depreciation expense on the building will be $187,500 for the year 2020.
		The accumulated depreciation account balance immediately after the replacement will be $2,000,000.
		None of the other answer choices is false.
		The remaining useful life of the asset at December 31, 2020 will be 15 years.

Answer 1

Depreciation expense on the building will be $187,500 for the year 2020.
Cost	$5,000,000
Less: Accumulated Depreciation	$2,500,000
($5,000,000/20 years x 10 years)
Book Value as on January 1, 2020	$2,500,000
Addition: Replacement	$500,000
	$3,000,000
Depreciation for 2020 ($3,000,000/16 years)	$187,500
Note: Because the book value of the old HVAC system is unknown,
the cost of the replacement HVAC system should be debited to the
building account and depreciated over the new remaining useful life
of the building.