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During 2017, Mercator Company borrowed $80,000 from a local bank. In addition, Mercator used $120,000 of cash

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During 2017, Mercator Company borrowed $80,000 from a local bank. In addition, Mercator used $120,000 of cash to construct a new corporate office building. Based on average accumulated expenditures, the amount of interest capitalized during 2017 was $8,000. Construction was completed, and the building was occupied on January 1, 2018.

Required

1. Determine the acquisition cost of the new building.

2. The building has an estimated useful life of 20 years and a $5,000 salvage value. Assuming that Mercator uses the straight-line basis to depreciate its operating assets, determine the amount of depreciation expense for 2017 and 2018.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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In accounting terms, depreciation is defined as the reduction of the recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible. An example of fixed assets are buildings, furniture, office equipment, machinery, etc. The land is the only exception that cannot be depreciated as the value of land appreciates with time. Depreciation allows a portion of the cost of a fixed asset to be the revenue generated by the fixed asset. This is mandatory under the matching principle as revenues are recorded with their associated expenses in the accounting period when the asset is in use. This helps in getting a complete picture of the revenue

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