Question

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 true?

		Because the new HVAC system will not increase the quality or quantity of the building's service potential over its remaining life, the replacement of the HVAC system may not be recorded as a capital expenditure.
		Depreciation on the building will not need to be recalculated after the replacement is recorded because the amount capitalized for the new HVAC system is less than 25% of the total cost of the new combined asset.
		None of the other answer choices is true.
		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.
		The journal entry to record the replacement of the HVAC system will include a loss on the disposal of the old HVAC system.

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?

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

Answer 1

Answer 1

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.

Explanation:

If any addition made to an asset leads to an increase in its capacity, such cost is capitalized in the books along with the asset.

Answer 2

Depreciation expense on the building will be $187,500 for the year 2020.

Explanation:

The carrying amount of building on January 1, 2010 = $ 5,000,000 - ($ 5,000,000 x 10/20)

= $ 2,500,000

Carrying amount of building after capitalizing cost of HVAC System = $ 2,500,000 + $ 500,000

= $ 3,000,000

Depreciation for 2020 year onwads = $ 3,000,000/16

= $ 187,500