Problem:
Merton Company purchased a building on January 1, 2007 at a cost of 364,000. Merton estimated that the building life would be 25 years and the residual value at the end of 25 years would be 14,000.
On January 1, 2008, 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 an additional six years.
In 2009, Merton altered its corporate strategy dramatically. The company sold the building on April 1, 2009, for 392,000 in cash and relocated all operations to another state.
Required to do:
1. Determine the amount of depreciation that should be reflected on the income statement for 2007 and 2008.
2. Explain why the cost of pollution control equipment was not expensed in 2008? What conditions would have allowed Merton to expense the equipment? If Merton has a choice, would it prefer to expense or capitalize the equipment?
3. What amount of gain or loss did Merton record when it sold the building? What amount of gain or loss would have been reported if the pollution control equipment had been expensed in 2008?