Capital Expenditures, Depreciation, and Disposal

Merton Company purchased a building on January 1, 2011, at a cost of $364,000. Merton estimated that its life would be 25 years and its residual value would be $14,000.

On January 1, 2012, the company made several expenditures related to the building. The entire building was painted and floors were refinished at a cost of $21,000. A federal agency required Merton to install additional pollution control devices in the building at a cost of $42,000. With the new devices, Merton believed it was possible to extend the life of the building by six years.

In 2013, Merton altered its corporate strategy dramatically. The company sold the building on April 1, 2013, for $392,000 in cash and relocated all operations to another state.

Required:

1. Determine the depreciation that should be on the income statement for 2011 and 2012.

2011	$
2012	$

2. Which of the following is the best answer in regards to having the company expense or capitalize the equipment?

1. Since the pollution control equipment extended the life of the asset, the asset should be expensed and the company would want this for tax purposes.
2. Since the pollution control equipment extended the life of the asset, the asset should be capitalized and the company would want this for tax purposes.
3. Since the pollution control equipment extended the life of the asset, the asset should be capitalized but the company would prefer to expense for tax purposes.
4. Extending the life of the asset makes no difference on whether to expense or capitalize and the company can choose which they would prefer.

SelectabcdItem 3

3. What amount of gain or loss did Merton record when it sold the building? Do not round intermediate calculations. If required, round your final answers to the nearest dollar. $

What amount of gain or loss would have been reported if the pollution control equipment had been expensed in 2012? $