Salem Company hired Kirk Construction to construct an office building for ₤9,600,000 on land costing ₤2,400,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2014 and it has a useful life of 40 years. The price of the building included land improvements costing ₤720,000 and personal property costing ₤900,000. The useful lives of the land improvements and the personal property are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What total amount of depreciation expense would Salem Company report on its income statement for the year ended December 31, 2014?

Question

Quizplus · Accepted Answer

The building cost excluding land improvements and personal property is ₤7,980,000 (₤9,600,000 - ₤720,000 - ₤900,000). Depreciation for the building is ₤199,500 (₤7,980,000 / 40 years). Depreciation for land improvements is ₤72,000 (₤720,000 / 10 years). Depreciation for personal property is ₤180,000 (₤900,000 / 5 years). Total depreciation expense is ₤451,500 (₤199,500 + ₤72,000 + ₤180,000).

Salem Company Hired Kirk Construction to Construct an Office Building