Peoples Corporation purchased a building on December 29,2012 that cost $1,000,000 and occupied it on January 2,2013.The owner estimated that the building would last 40 years with a salvage value of $100,000 using straight-line depreciation.In early 2016,Mr.Peoples learned that due to a permanent highway closure,the company needs to relocate at the end of 2018.He believes that the salvage value at that time will be $700,000.Compute the amount of depreciation to record during 2016,and each of the two years thereafter.
A)$22,500
B)$52,500
C)$77,500
D)$100,000

Question

Quizplus · Accepted Answer

The depreciable amount of the building is $900,000 ($1,000,000 - $100,000). 
The annual depreciation expense is $22,500 ($900,000 ÷ 40).

For 2016, only one year of depreciation is recorded before the company plans to relocate. Therefore, the depreciation expense for 2016 is $22,500.

For 2017 and 2018, the company will record two full years of depreciation expense. Therefore, the annual depreciation expense for those years is still $22,500.

At the end of 2018, the building's book value will be $832,500 ($1,000,000 - 3 years of depreciation at $22,500 per year). Once the building is sold for $700,000, the company will record a loss of $132,500 ($832,500 - $700,000).

Peoples Corporation Purchased a Building on December 29,2012 That Cost