[Sibiri]

I am studying for the CPA and I came across this question but I don’t agree with the answer: Please help. here is the question:

On 01/Y1, Tom. Inc acquired a land leased for 21-year period with no option to renew. The lease requires Tom to build a building instead of renting. The building, completed in 01/Y2, 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 Tom 12/31/Y2 balance sheet?

The answer given as correct is $798,000.

I believe the answer should be $819,000.

Can anyone help?

[Becca]

Since the building is completed in Year 2: 840,000 cost/20 years = 42,000 depreciation. 840,000 cost – 42,000 depreciation = 798,000 carrying amount on balance sheet.

[itooshallpass]

Yep. I believe the salvage value is ignored because Tom can't renew the lease and so will not have title when the lease is up.

[Author]

Replies