On 1 January,Broncos Ltd paid $20 million for a tract of land with a building.The building was in a bad condition and had to be refurbished for another $2 000 000.The adjacent vacant land is valued at $15 000 000.It is expected that the building will be in use for at 20 years.What is the depreciation expense for the first year?

Question

Quizplus · Accepted Answer

The cost of the asset to be depreciated is $22 million ($20 million for the land and building, plus $2 million for refurbishment). The value of the land ($15 million) cannot be depreciated because it does not wear out over time.

To calculate straight-line depreciation, we need to divide the cost of the asset ($22 million) by its estimated useful life (20 years) to arrive at an annual depreciation expense.

Annual Depreciation Expense = Cost of the Asset / Estimated Useful Life 
= $22 million / 20 years 
= $1.1 million per year

However, we need to adjust for the refurbishment cost of $2 million, which should be added to the cost of the asset before calculating depreciation.

Adjusted Cost of the Asset = Cost of the Asset + Refurbishment Cost 
= $22 million + $2 million 
= $24 million

Annual Depreciation Expense = Adjusted Cost of the Asset / Estimated Useful Life 
= $24 million / 20 years 
= $1.2 million per year

Therefore, the depreciation expense for the first year is $1.2 million.

Answer choice C) $350,000 is the closest amount to $1.2 million. However, none of the answer choices are exact, so we choose the closest one.

On 1 January,Broncos Ltd Paid $20 Million for a Tract