Mooney Ltd. completed the construction of an office building for 2,400,000 on December 31, 2019. The company estimated that the building would have a residual value of 0 and a useful life of 40 years. A more detailed review of the expenditures related to the building indicates that 300,000 of the total cost was used for personal property and 180,000 for land improvements. The personal property has a depreciable life of 5 years and land improvements have a depreciable life of 10 years.

Instructions

a. Compute depreciation expense for 2020 using component depreciation and the straightline method.

b. assume a yearly accounting period ending on 31 May 2020. Prepare the adjusting journal entry for depreciation on that date.

c. Prior to the IFRS requirement to depreciate components separately, all of the 2,400,000 may well have been depreciated using the useful life and residual value of the building. Calculate the depreciation expense for the calendar year 2020 under this scenario. Compare this with what you calculated for Instruction a). If management were opportunistic, would they have preferred the result just calculated or the result in a)? Explain why.