In 2000 a city constructed a park but has inadequate records of its cost. Engineers estimate that in 2012 the cost of replacing that park would be $3 million. They have also determined that the park has a total useful life of 30 years.
An appropriate construction price index had a value of 108 in 2000 and 180 in 2012.
1. Based on the relationship between the price indices of 2000 and 2012, what value (estimated initial cost) should the city assign to the park? That is, what do you think it cost the city to construct the park in the year 2000?
2. Considering that the park is now 12 years into its useful life of 30 years, how much accumulated depreciation should it recognize?
3. Suppose that the city opted to report only an annual maintenance charge for the park and a preservation charge as necessary—that is, it opted for the modified approach and would not record a depreciation charge. At what value would it report the park?
4. In your opinion, does the depreciation charge add significant information to the financial statements? Explain and justify your response.