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Expert-verified Found in: Page 606 ### Intermediate Accounting (Kieso)

Book edition 16th
Author(s) Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Pages 1552 pages
ISBN 9781118743201

# Francisco Corporation is constructing a new building at a total initial cost of $10,000,000. The building is expected to have a useful life of 50 years with no residual value. The building’s finished surfaces (e.g., roof cover and floor cover) are 5% of this cost and have a useful life of 20 years. Building services systems (e.g., electric, heating, and plumbing) are 20% of the cost and have a useful life of 25 years. The depreciation in the first year using component depreciation, assuming straight-line depreciation with no residual value, is:$200,000.$215,000.$255,000. None of the above.

The correct option is option (c) $255,000. See the step by step solution ### Step by Step Solution ## Step 1: Meaning of Depreciation In accounting, depreciation refers to an expense incurred on an intangible asset due to corrosion and abrasion. A firm may adopt various methods for computing depreciation to reflect the true and accurate value of the asset. ## Step 2: Explaining the correct option Computation of depreciation of finished surfaces: Cost of asset = Initial cost x Rate covering building surfaces =$10,000.00 x 5%

= $500,00 Depreciation = = =$25,000

Computation of depreciation of service systems:

Cost of asset = Initial cost x Rate covering building service system

= $10,000,000 x 20% =$2,000, 000

Depreciation = = = $80,000 Computation of depreciation for the remaining cost of building: Cost = Initial building cost - Cost of asset of surfaces and service system =$10,000,000 - $500,000 -$2,000,000

= $7,500,000 Depreciation = = $150,000

So, the total depreciation is $255,000 ($25,000+80,000+$150,000). ## Step 3: Explaining the incorrect options Option (a): Depreciation expense of$200,000 only includes the depreciation of the finished surfaces ($25,000) and the depreciation of the remaining cost of the building ($150,000). The depreciation of the service system is omitted.

Option (b): The service system's depreciation expense may be undervalued because the actual depreciation is $80,000 and the incorrect depreciation is$15,000.

Option (d): The depreciation expense for the asset is \$255,000, and it is also mentioned in option (c), so options (a), (b), and (d) are incorrect.

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