Question

Martinez Company owns a building that appears on its prior year-end balance sheet at its original \(572,000 cost less \)429,000 accumulated depreciation. The building is depreciated on a straight-line basis assuming a 20-year life and no salvage value. During the first week in January of the current calendar year, major structural repairs are completed on the building at a $68,350 cost. The repairs extend its useful life for 5 years beyond the 20 years originally estimated.

1. Determine the building’s age (plant asset age) as of the prior year-end balance sheet date.
2. Prepare the entry to record the cost of the structural repairs that are paid in cash.
3. Determine the book value of the building immediately after the repairs are recorded.
4. Prepare the entry to record the current calendar year’s depreciation.

Short answer

1. The building’s age is 15 years.
2. The building is debited with $68,350.
3. The book value is$211,350.
4. The depreciation expense is $21,135.

Step-by-step solution

Computation of the building’s age

$\begin{array}{rcl}\mathbf{The}\mathbf{}\mathbf{building}\mathbf{\text{'}}\mathbf{s}\mathbf{}\mathbf{ }\mathbf{age}& \mathbf{=}& \frac{\mathbf{accumulated}\mathbf{}\mathbf{ }\mathbf{ }\mathbf{depreciation}}{\mathbf{annual}\mathbf{}\mathbf{ }\mathbf{ }\mathbf{depreciation}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \frac{\mathbf{\$}\mathbf{429}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{28}\mathbf{,}\mathbf{600}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{15}\mathbf{}\mathbf{years}\mathbf{.}\end{array}$

$\begin{array}{rcl}\mathrm{The}\mathrm{annual} \mathrm{depreciation}& =& \frac{\mathrm{cost}-\mathrm{salvage}}{\mathrm{useful} \mathrm{life}}\\ & =& \frac{\$572,000}{20\mathrm{years}}\\ & =& \$28,600.\end{array}$

The building’s age as of the prior year-end balance sheet date is 15 years.

Entry to record structural repairs

Jan	Building	$68,350
	Cash		$68,350
	Record structural repairs of building

Determining the book value of the building after the repairs are recorded

$\begin{array}{rcl}\mathit{B}\mathit{o}\mathit{o}\mathit{k}\mathbf{}\mathbf{ }\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{ }\mathbf{}\mathit{a}\mathit{f}\mathit{t}\mathit{e}\mathit{r}\mathbf{ }\mathbf{}\mathit{r}\mathit{e}\mathit{p}\mathit{a}\mathit{i}\mathit{r}& \mathbf{=}& \mathit{c}\mathit{o}\mathit{s}\mathit{t}\mathbf{-}\mathit{a}\mathit{c}\mathit{c}\mathit{u}\mathit{m}\mathit{u}\mathit{l}\mathit{a}\mathit{t}\mathit{e}\mathit{d}\mathbf{}\mathbf{ }\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{+}\mathit{r}\mathit{e}\mathit{p}\mathit{a}\mathit{i}\mathit{r}\mathit{s}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{572}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{429}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{68}\mathbf{,}\mathbf{350}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}& \mathbf{=}& \mathbf{\$}\mathbf{211}\mathbf{,}\mathbf{350}\mathbf{.}\end{array}$

The book value of the building after the repairs are recorded is $211,350.

Entry to record current year depreciation

Depreciation:Depreciation refers to the reduction in a book value of an asset over its useful life.

Dec.	Depreciation expense-building	$21,135
	Accumulated depreciation-building		$21,350
	Record depreciation expense of building

Note:

$\mathbf{Depreciation}\mathbf{=}\frac{\mathbf{cost}\mathbf{-}\mathbf{revised}\mathbf{}\mathbf{ }\mathbf{salvage}\mathbf{}\mathbf{ }\mathbf{value}}{\mathbf{revised}\mathbf{}\mathbf{ }\mathbf{useful}\mathbf{}\mathbf{ }\mathbf{life}}\mathbf{.}$

A revised useful life is computed as the original remaining life (i.e., 5 years, 20 years-15 years) plus extended useful life. Thus, the revised useful life is 10 years (5 years+5years).

$\mathrm{Cost}=\mathrm{book} \mathrm{value} \mathrm{after} \mathrm{repair}.$

$\begin{array}{rcl}\mathrm{Depreciation}& =& \frac{\$211,350}{\$10}\\ & =& \$21,135.\end{array}$