In 1985, Lincoln Limited completed the construction of a building at a cost of $ 1.8 million; it occupied it in January 1986. It was estimated that the building would have a useful life of 40 years and a residual value of $400,000.
Early in 1996, an addition to the building was constructed at a cost of $750,000. At that time, no changes were expected in its useful life, but the residual value with the addition was estimated to increase by $150,000. The addition would not be of economic use to the company beyond the life of the original building.
In 2014, as a result of a thorough review of its depreciation policies, company management determined that the building's original useful life should have been estimated at 30 years. The neighbourhood where the building is has been going through a renewal, with older buildings being torn down and new ones being built. Because of this, it is now expected that the company's building and addition are unlikely to have any residual value at the end of the 30-year period.
Instructions
(a) Using the straight-line method, calculate the annual depreciation that was charged from 1986 through 1995.
(b) Calculate the annual depreciation that was charged from 1996 through 2013.
(c) Prepare the entry, if necessary, to adjust the account balances because the estimated useful life was revised in 2014.
(d) Calculate the annual depreciation to be charged beginning with 2014.
(e) Comment on the revision of the estimated useful life in 2014, from the perspective of an investor who purchased shares in Lincoln in 2013.