Question

A building that was purchased on December 31, 2003, for $2,500,000 was originally estimated to have a life of 50 years with no salvage value at the end of that time. Depreciation has been recorded through 2017. During 2018, an examination of the building by an engineering firm discloses that its estimated useful life is 15 years after 2017. What should be the amount of depreciation for 2018?

Short answer

Depreciation for 2018 is $120,000.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Depreciation

Depreciation expense is an expense that is incurred on a tangible asset due to obsolescence or the passage of time on that asset. A company has different options for determining depreciation, but straight-line depreciation is the simplest one.

Determining the amount of depreciation for 2018

Original estimate	$50,000 per year
Depreciation till December 31, 2017: $50,000 X 14	$700,000
Building value as of January 1, 2018: ($2,500,000 - $700,000)	$1,800,000
Depreciation in 2018	$120,000

Working notes:

Calculating the amount of the original estimate

$\begin{array}{c}\text{Original\hspace{0.17em}estimate}=\frac{\text{Cost\hspace{0.17em}of\hspace{0.17em}building}}{\text{Estimated\hspace{0.17em}life}}\\ =\frac{\mathrm{\$}250,000}{50}\\ =\mathrm{\$}50,000\end{array}$

Calculating the depreciation amount

$$\begin{gathered} \text{Depreciation}=\frac{\text{Cost\hspace{0.17em}of\hspace{0.17em}building}-\text{Depreciation\hspace{0.17em}to\hspace{0.17em}January}}{\text{Useful\hspace{0.17em}life}} \\ =\frac{\mathrm{\$}2,500,000-\mathrm{\$}700,000}{15} \\ =\mathrm{\$}120,000 \end{gathered}$$