What is the cost of the new building?
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.
Builder Inc., a private corporation, self-constructed a new commercial building in 2021. On September 30, 2021, construction was completed, and the building became ready to be used as management intended. However, it began operations on November 1, 2021 when most staff was hired. The following costs were incurred for the building construction: 1. Direct labour costs incurred before October 2021, $450,000 2. Additional direct labour costs incurred in October 2021, $90,000 3. Material purchased for the building in September 2021, $675,000 4. Net rental profit for the temporary use of land as a parking lot, $54,000 5. Allocation of the CEO’s salary, $135,000 What is the cost of the new building? Company follows ASPE. a. $1,215,000 b. $1,071,000 c. $1,161,000 d. $1,296,000 e. $1,125,000
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