Question

In 1998, Matlock Company completed the construction of a building at a cost of $2.2 million, which was first occupied in January 1999. The estimated useful life of the building was set at 40 years, with a salvage value of $65,600 anticipated at the end of that period. In 2009, an addition to the building was constructed at a cost of $550,000. At that time, it was projected that the remaining life of the original building would align with the initial estimate of 40 years, and the addition would have a separate life span of 30 years, with an associated salvage value of $22,000. As of 2027, it has been determined that the probable life of the building addition will extend to the end of 2015, representing a 20-year period. Provide an analysis of the current valuation of the entire structure and discuss how this information should be reflected in the company's financial statements.

Answer 1

To determine the current valuation of the entire structure, the costs and accumulated depreciation of both the original building and the addition must be calculated. The original building and the addition have different useful life estimates and salvage values, and the revised life span of the addition must be factored into its depreciation calculation. The adjusted basis of each part after depreciation will reflect the current valuation in the company's financial statements.

Step-by-step explanation:

The calculation of the current valuation of Matlock Company's building involves determining the adjusted basis of the original structure and the addition, taking into account depreciation up to the year 2027. The original building cost was $2.2 million and it was supposed to have a useful life of 40 years with a salvage value of $65,600. The addition, which cost $550,000, had an estimated life of 30 years with a salvage value of $22,000; however, it has been determined to have a probable life of only 20 years.

Depreciation for the original building will be calculated from January 1999 to 2027, which is 28 years. For the building addition, depreciation will be calculated for the 18 years from 2009 to 2027 (not 20 years as it is said to extend 'to the end of 2015', which seems to be a typo and must mean 2025).

The depreciation expense for each year for the original building is calculated by subtracting the salvage value from the cost and then dividing by the useful life ((2,200,000 - 65,600) ÷ 40). For the addition, the initial depreciation expense should be recalculated to adjust for the shortened life span of 20 years instead of 30 ((550,000 - 22,000) ÷ 20). These calculated depreciations per year should be multiplied by the number of years the assets were in use to find the accumulated depreciation for both the original building and the addition up to 2027.

The adjusted basis is then calculated by subtracting the accumulated depreciation from the cost of each. The valuation of the building in the company's financial statements will reflect this adjusted basis. Additionally, if necessary, adjustments due to the revision of the addition's lifespan must be accounted for in the financial period when this determination was made.