Michaux Ltd. purchased an office building on January 1, 2006, for $450,000. At that time, it was estimated that the building would last for 30 years and would have a residual value of $90,000. Early in 2012, a significant modification was made to the roof of the building at a cost of $30,000. This modification could not be identified as a separate component, but it was believed that it would add an additional ten years to the useful life. As well, it was estimated the residual value would be reduced to $50,000 at the end of the revised useful life. In 2020, due to a collapse in the local property market, the residual value was revised to nil. The useful life, however, was expected to remain as estimated in 2012. The company uses the straight-line method of depreciation. Required: a. Calculate the annual depreciation that was charged from 2006 to 2011. b. Calculate the annual depreciation that was charged from 2012 to 2019. c. Calculate the annual depreciation that will be charged from 2020 onwards.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Michaux Ltd. purchased an office building on January 1, 2006, for $450,000. At that time, it
was estimated that the building would last for 30 years and would have a residual value of
$90,000. Early in 2012, a significant modification was made to the roof of the building at a
cost of $30,000. This modification could not be identified as a separate component, but it was
believed that it would add an additional ten years to the useful life. As well, it was estimated the
residual value would be reduced to $50,000 at the end of the revised useful life. In 2020, due
to a collapse in the local property market, the residual value was revised to nil. The useful life,
however, was expected to remain as estimated in 2012. The company uses the straight-line
method of
Required:
a. Calculate the annual depreciation that was charged from 2006 to 2011.
b. Calculate the annual depreciation that was charged from 2012 to 2019.
c. Calculate the annual depreciation that will be charged from 2020 onwards.
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