A recent annual report for AMERCO, the holding company for U-Haul International Inc. included the following note: Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Interest costs incurred during the initial construction of buildings or rental equipment are considered part of the cost. Depreciation is computed for financial reporting purposes principally using the straight-line method over the fol- lowing estimated useful lives: rental equipment 2-20 years, building and non-rental equipment 3-55 years. Major overhauls to rental equipment are capitalized and are depreciated over the estimated period benefited. Routine maintenance costs are charged to operating expense as they are incurred. AMERCO subsidiaries own property, plant, and equipment that provide offices for U-Haul and that are utilized in the manufacture, repair, and rental of U-Haul equipment. Assume that AMERCO made extensive repairs on an existing building and added a new wing. The building is a garage and repair facility for rental trucks that serve the Seattle area. The existing building originally cost $460,000, and by the end of 2011 (5 years), it was one-quarter depreciated on the basis of a 20-year estimated useful life and no residual value. Assume straight-line depreciation, computed to the nearest month. During 2012, the following expenditures related to the building were made:

a. Ordinary repairs and maintenance expenditures for the year, $10,000 paid in cash.

b. Extensive and major repairs to the roof of the building, $34,000 paid in cash. These repairs were completed on June 30, 2012.

c. The new wing was completed on June 30, 2012, at a cash cost of $173,000. By itself, the wing had an estimated useful life of 15 years and no residual value. The company intends to sell the building and wing at the end of the building's useful life (in 14 years from June 30, 2012).

Required:
1. Applying the policies of AMERCO, complete the following schedule, indicating the effects of the preceding expenditures. If there is no effect on an account, write NE on the line:

2. What was the carrying amount of the building on December 31, 2012?
3. Explain the effect of depreciation on cash flows.

Transcribed Image Text:

Accumulated Building Depreciation Depreciation Expense Repairs Expense Cash Balance, January 1, 2012 $460,000 $115,000 Depreciation Jan. 1-June 30 Balance prior to expenditures 460,000 Expenditure a Expenditure b Expenciture c Depreciation July 1-December 31: Existing building Major repairs and betterments Balanco, December 31, 2012