91Ó°ÊÓ

Depreciation is a branch of accounting that deals with systematically spreading or dividing the cost or other principal value of a fixed assetover its expected useful life by charging regular expenses or revenues.

Determining the depreciation

$\begin{array}{rcl}\text{Depreciation}& =& \frac{\text{Cost}\text{of}\text{asset}-\text{Residual}\text{value}}{\text{Useful} \text{life}}\\ & =& \frac{\$2,200,000}{40}\\ & =& \$55,000\end{array}$

Working note:

Calculation of accumulated depreciation-Building

$\begin{array}{rcl}\text{Depreciation}& =& \text{Cost}\text{of}\text{roof}×\frac{\text{Useful}\text{life}}{\text{Estimated}\text{life}}\\ & =& \$160,000×\frac{20}{40}\\ & =& \$80,000\end{array}$

Note: Since the cost of the previous roof is known, the most suitable entry would be to remove it and record a loss on disposal. Another option is to deduct Accumulated Depreciation— Buildings on the basis that the replacement will extend the building's useful life. In this scenario, the entry would be as follows:

In January 2018, while recording the revision in the estimated life of the building, it was found that no entry is required to be passed in the books of accounts.

Working Notes:

Calculation of Depreciation for 2018

$\begin{array}{rcl}\text{Depreciation}& =& \frac{\text{Building}\text{amount}\text{after}\text{adjustment}}{\text{Useful} \text{life}}\\ & =& \frac{\$1,320,000}{25}\\ & =& \$52,800\end{array}$

There is another option for determining depreciation

Working notes:

Calculation of Depreciation for 2018

$\begin{array}{rcl}\text{Depreciation}& =& \frac{\text{Cost}\text{of}\text{building}\text{after}\text{adjustment}}{\text{Useful}\text{life}}\\ & =& \frac{\$1,400,000}{25}\\ & =& \$56,000\end{array}$