[startupcfo]

MCQ 925:

On January 1, 20X1, 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, 20X2, 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, 20X2, balance sheet?

This is my rationale: That the building starts at 840K with a “salvage value” of 420K, with a total depreciation of 840-420= 420K of depreciation over 20 years. That’s 21K of depreciation after 1 year.

so 840K starting value minus 21K of straight line depreciation = $819,000

This is what the book says:

This building is treated as a leasehold improvement. Although the land lease is for 21 years, the building will be in use for 20 years; thus, the depreciation period for the building is 20 years:

Cost / Life = $840,000 / 20 years = $42,000/year
Building cost – Depreciation = Carrying Value of Building
$840,000 – $42,000 = $798,000

BEC - 87 | 02/28
REG - 70 | 06/10, REMATCH | 08/30
AUD - XX | 09/10
FAR - XX | 12/10