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Simpson purchased a property on 1 April 2006 for $240,000 (of which $60,000 related to land). The building was depreciated at a rate of 2% per annum on a straight-line basis, with a proportionate charge being made in the year of purchase. On 31 December 2012 the property was revalued to $820,000 (including $360,000 relating to land).What amounts should be included in Simpson’s financial statements for the year ended 31 December 2013?
What possibly could be the answer for this?
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Actually, the above question is not complete.
It includes the following 4 options, ie;a) Depreciation expense : $10,635, Land and buildings : $809,365
b) Depreciation expense : $10,635, Land and buildings : $449,365
c) Depreciation expense : $9200, Land and buildings : $810,800
d) Depreciation expense : $9200, Land and buildings : $450,800The answer that I got is c). Which is obtained by depreciating $460000 worth of buildings at the rate of 2% per annum and calculating the total assets by deducting the depreciation of $9200 from total assets of $820000.
But the right answer is a).
Can you please explain how the right answer is obtained.
Straight line depreciation at 2% means that at the date of purchase the expected life of the building was 50 years (100%/2%).
The date of the revaluation was 6.75 years later than the date of purchase and therefore that date the remaining life was 50 – 6.75 = 43.25 years. Therefore the new depreciation is 460,000/43.25 = $10,635 per year.
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