A large urban health maintenance organization (HMO) purchases a vacant office building to house expanded administrative functions for $300,000. Prior to using the building, renovations costing $100,000 are completed. The renovated building has an estimated useful life of 27.5 years, with no residual value. What is the annual charge for depreciation?
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To calculate the annual charge for depreciation, we need to determine the depreciable cost of the building. The depreciable cost is the initial cost of the building minus any residual value, if applicable.
In this case, since there is no residual value, the depreciable cost is equal to the total cost of purchase and renovations: $300,000 + $100,000 = $400,000.
Next, we divide the depreciable cost by the estimated useful life of the building in years to find the annual depreciation charge:
Annual Depreciation = Depreciable Cost / Useful Life
Annual Depreciation = $400,000 / 27.5 years
Annual Depreciation ≈ $14,545.45
Therefore, the annual charge for depreciation is approximately $14,545.45.
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