sohini
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Joined: 31 Mar 2010
Location: United States
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| Posted: 04 Feb 2011 at 21:28 | IP Logged
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On January 1, 1989, Bay Co. acquired a land lease for a 21-year period with no option to renew. The lease
required Bay to construct a building in lieu of rent. The building, completed on January 1, 1990, at a cost of
$840,000, will be depreciated using the straight-line method. At the end of the lease, the building's estimated
market value will be $420,000. What is the building's carrying amount in Bay's December 31, 1990, balance
sheet?
a. $798,000
b. $800,000
c. $819,000
d. $820,000
Explanation
Choice "a" is correct. $798,000
Rule: Depreciable property constructed on leased land is depreciated over the life of the property or the term of
the lease, whichever is shorter.
Annual depreciation = building costs $840,000 / remaining term of land lease 20 years = $42,000 per year
Building cost $840,000
Less 1990 depreciation (42,000)
Carrying amount at 12/31/90 $ 798,000 "a"
My question is whya are they not taking $420 as salvage value? please explain
Thanks
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MAII
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| Posted: 04 Feb 2011 at 22:58 | IP Logged
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The market value of 420,000 is there as a distractor. The carrying amount of an asset is the cost less accumulated depreciation. In this case, it's 798,000 at 12/31/90.
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