Accounting Scenario in a Regional Office Building: Assets and Amortization

QUESTION

o simplify the scenario, this regional office building is managed independently, and the accounting is similar to a small independent not-for-profit organisation.

** Expenses such as supplies, utilities and salaries are all covered by the headquarters and not part of this scenario

*** The department’s accounting policy on asset requires that any individual asset valued at over $10k be recorded as a capital asset and below $10k be expensed according to the Directive on Accounting Standards: GC 3150 Tangible Capital Assets (canada.ca).

**** Amortization is calculated using the straight-line method.

Event 1: Last winter, the heating was often failing in the regional office and the facilities manager decided to acquire a new furnace. The old one was expected to last another 4 years but has failed to reach the end of its useful life. At the time, it still had a value of 4000$ and the annual amortisation set at 1000$ per year. The cost of the new one is $124’000.00 and is expected to last for 25 years, after which it is expected to have no residual value.

Event 2: The office administrator got permission from Crown Asset Disposal to sell off a lot of old chairs and desks that are no longer needed as people are mostly working remotely. They sold for $4’000.00 and the Invoice has been settled. These chairs and desks were all individually purchased at prices below $10k.

Event 3: With more individuals working remotely, it was decided to make some office improvements and some space was converted into highly functional meeting and training rooms. With the new design, it was decided to also refresh the office paint scheme to match. The new facilities were built at a cost of $65’000.00 and the paint for the rest of the office was $3’000.00. The department owns the building. It was acquired new 30 years ago and fully amortized. It’s estimated that this will extend the building’s life expectancy by another 10 years. What will be the combined balance of the Asset account after all has been recorded?

a $195’000

b $192’000

c $189’000

d $193’000

6.What is going to be the Closing balance for amortization expense for the year ended March 31, 2024

a $11’460

b $12’460

c $16’460

d No amortisation after first year of use

7.The chairs being disposed of were capitalised when originally purchased. What is the impact on the financial statement?

a) Asset understated and cash overstated.

b) Expenses overstated and cash understated.

c)Revenue overstated and expenses understated.

d) Asset overstated and expenses understated. No impact

ANSWER

Accounting Scenario in a Regional Office Building: Assets and Amortization

Introduction

In this scenario, we explore the accounting practices of a regional office building managed independently, resembling a small not-for-profit organization. We’ll examine three significant events, including the acquisition of a new furnace, the sale of old chairs and desks, and office improvements. Additionally, we’ll calculate the combined balance of the Asset account and the closing balance for amortization expense for the year ended March 31, 2024. Finally, we’ll analyze the impact of disposing of capitalized chairs on the financial statements.

Event 1: Acquisition of a New Furnace

The facilities manager decided to purchase a new furnace as the old one was frequently failing. The old furnace had an expected useful life of 4 years, but it failed prematurely and still had a value of $4,000. The new furnace cost $124,000 and is expected to last for 25 years, with no residual value.

Based on the accounting policy, any individual asset valued over $10,000 is recorded as a capital asset. Therefore, the old furnace’s remaining value of $4,000 should be expensed, and the new furnace should be recorded as a capital asset. The initial value of the new furnace will be $124,000, and it will be amortized over its useful life of 25 years using the straight-line method.

Event 2: Sale of Old Chairs and Desks

The office administrator received permission to sell off old chairs and desks, generating $4,000 in revenue. These items were individually purchased at prices below $10,000 and were capitalized when originally purchased.

As the chairs and desks were capitalized, their original cost should be removed from the Asset account and recorded as revenue in the financial statements. The impact on the financial statement will be: d) Asset overstated and expenses understated. No impact.

Event 3: Office Improvements and Refreshing Paint Scheme

Due to remote work arrangements, the office space was converted into functional meeting and training rooms, with additional paint refresh throughout the building. The cost of the improvements was $65,000, and the paint cost $3,000. The building, owned by the department, was fully amortized since its acquisition 30 years ago. The improvements are expected to extend the building’s life expectancy by 10 years.

Since the building was fully amortized, the office improvements and paint should be recorded as new capital assets, and their combined cost of $68,000 will be amortized over their useful life of 10 years using the straight-line method.

Combined Balance of the Asset Account

To calculate the combined balance of the Asset account after recording all events, we add the value of the new furnace ($124,000) and the cost of office improvements and paint ($68,000) while deducting the revenue from the sale of chairs and desks ($4,000). The combined balance of the Asset account will be: b) $192,000.

Closing Balance for Amortization Expense (Year Ended March 31, 2024):
For the year ended March 31, 2024, we need to calculate the total amortization expense. The new furnace has an annual amortization of $124,000 / 25 years = $4,960. The office improvements and paint have a combined annual amortization of $68,000 / 10 years = $6,800.

Therefore, the closing balance for amortization expense for the year ended March 31, 2024 will be: $4,960 + $6,800 = $11,760.

Conclusion

In conclusion, the combined balance of the Asset account after all events have been recorded is $192,000 (option b). The closing balance for amortization expense for the year ended March 31, 2024, will be $11,760. Disposing of the capitalized chairs and desks will have no impact on the financial statements, as it will result in the Asset account being overstated and expenses being understated.