Question

XYZ Consulting bought new building for its headquarters in the year 2010. The purchase cost was 215,047 dollars and in addition it had to spend 29,996 dollars adapting the space for its services. The building has been in use since June 5, 2010. TVM Consulting forecasted that in 2040 the building would have a net salvage value of $1,000,000. Using the US Straight Line Depreciation Schedule, estimate the total value of depreciation recorded in the accounting books if XYZ consulting decides to sell the building on April 21, 2014 (i.e. summation of all annual depreciation amounts recorded throughout the years of usage).

Answer 1

Using the US Straight Line Depreciation method, the total depreciation recorded for XYZ Consulting's building from June 5, 2010, to April 21, 2014, amounts to $23,822.62. This calculation is based on the initial cost of $245,043 with no salvage value, spread across the asset's 30-year useful life and prorated for partial years of use.

Step-by-step explanation:

To calculate the depreciation for XYZ Consulting's new building, we utilize the US Straight Line Depreciation method. This method spreads the cost of an asset evenly across its useful life. To begin, we must determine the initial cost of the building, which includes both the purchase price and the additional costs for adapting the space. The total initial cost is $215,047 (purchase cost) + $29,996 (additional costs) = $245,043.

Next, we need to calculate the annual depreciation expense. This is done by subtracting the estimated salvage value at the end of its useful life from the initial cost, and then dividing by the number of years in its useful life. Assuming that the useful life of the building is 30 years (2010 to 2040), the annual depreciation expense is calculated as ($245,043 - $1,000,000 salvage value) / 30 years = -$25,198.57. However, as US accounting principles do not allow assets to have a negative book value, we should consider an alternative salvage value that is lower than the initial cost to continue with the correct calculation.

Assuming the salvage value is an error in the question, we disregard the $1,000,000 figure and consider the building will have no salvage value. In that case, the annual depreciation expense becomes $245,043 / 30 years = $8,168.10. XYZ Consulting used the building from June 5, 2010, to April 21, 2014, which amounts to just under 4 years. Since the expenses for the first and last years should be adjusted for the number of months the building was in use, we calculate the depreciation for the full two middle years and then add the prorated amounts for the partial years.

The total depreciation for the two full years (2011 and 2012) is 2 * $8,168.10 = $16,336.20. For 2010, the building was in use for approximately 7 months (June through December), so the prorated depreciation for 2010 is (7/12) * $8,168.10 = $4,763.72. For 2014, the building was used for nearly 4 months (January through April), so the prorated depreciation for 2014 is (4/12) * $8,168.10 = $2,722.70.

Adding it all up, the total depreciation recorded in the books from 2010 to 2014 would be $4,763.72 (2010) + $16,336.20 (2011 and 2012) + $2,722.70 (2014) = $23,822.62.