Exercise 11-7 (Static) Depreciation methods; partial periods [LO11-2] On March 31, 2021, Susquehanna Insurance purchased an office building for $12,000,000. Based on their relative fair values, one-third of the purchase price was allocated to the land and two-thirds to the building. Furniture and fixtures were purchased separately from office equipment on the same date for $1,200,000 and $700,000, respectively. The company uses the straight-line method to depreciate its buildings and the double-declining-balance method to depreciate all other depreciable assets. The estimated useful lives and residual values of these assets are as follows: Service Life Residual Value Building 30 10% of cost Furniture and fixtures 10 10% of cost Office equipment 5 $30,000 Required: Calculate depreciation for 2021 and 2022.

Note: The first year's depreciation for the three assets is lesser due to the depreciation calculated for 9 months from April to December and the next year's depreciation is for 12 months.

Depreciation Straight Line Method= Cost - Salvage Value/ Useful Life

A. Depreciation Building Straight Line Method= $ 8,000,000- $800,000/ 30= $ 240,000

The depreciation expense using the straight line method does not change unless the salvage value is reached.

B. Straight Line Rate= 100%/ useful Life

Straight Line Rate for furniture= 100%/ useful Life= 100%/10= 10 %

Straight Line Rate Office Equipment= 100%/ useful Life= 100%/ 5= 20 %

Double Declining Method = 2 * Straight Line Rate

Double Declining Method Furniture= 2 * Straight Line Rate= 2*10%= 20%

Double Declining Method Office Equipment= 2 * Straight Line Rate= 2*20%= 40%

In double declining method the rate is multiplied to the cost to get the depreciation expense. 20 % of $ 12,000,000= $ 2400,000

Each year the rate is multiplied with the remaining book value after deducting the depreciation expense from the cost as $ 12,000,000- $ 1,800,000= $ 10,200,000

Next years depreciation will be $ 10,200,000 * 20%= $ 2040,000.

This will be added in the original depreciation expense $ 1800,000 + $ 2040,000 = $ 3840,000 and deducted from cost to get the book value. $ 12,000,000- $ 3840,000 = $ 8160,000

Again rate will be multiplied and each years depreciation will be calculated similarly.

It has been summarized in the table below.

Years Dep Rate Dep Expense Accu. Dep. Book

Value

a. 2021 20% 12,000,000 2400,000 1800,000 $ 10,200,000

b. 2022 20% $ 10,200,000 2040,000 3840,000 $ 8160,000

Office Equipment

Years Dep Rate Dep Expense Accu. Dep. Book

Value

a. 2021 40% 700,000 280,000 210 ,000 $ 490,000

b. 2022 40% $ 490,000 196,000 406,000 $ 294,000

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