Exam 9: Reporting and Analyzing Long-Lived Assets

A company purchases a remote building site for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true?

The Old Fix-It is a company specializing in the restoration of old homes. To showcase its work, the company purchased an old Victorian home in downtown Pittsburg, Kansas on January 2, 2010. The original home was purchased for $125,000. A new heating and air-conditioning system was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were refurbished to their original condition, at a cost of $75,000. The project was such a success, that Old Fix-It decided on January 2, 2014, to purchase another very large home, this time in nearby Joplin, Missouri. On January 3, 2014, a realtor offered to purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments for visiting dignitaries. Mark Gibson, the president of Old Fix-It, decided that the $50,000 gain over purchase price was appropriate, and so he agreed to sell the showcase house. Only afterward did he learn that Old Fix-It had a loss of almost $30,000 on the sale. Mark does not believe that a loss is possible. "We sold that house for more than we paid for it," he said. "I know we put some money in it, but we had depreciated it for four years. How in the world can we have a loss?" Due to the commercial aspects of the property and its expected traffic flow, the life of the showcase house was established as 15 years. Old Fix-It utilized straight-line depreciation with no salvage or residual value. Old Fix-It took full years' of depreciation in 2010 through 2013 and none in 2014 due to the sale date of January 3, 2014. Required: Write a short memo to Mr. Gibson explaining how it would be possible to have a loss. Address cost and depreciation as general numbers rather than specific values.

Which of the following assets does not decline in service potential over the course of its useful life?