Capital Expenditures, Depreciation, and Disposal Merton Company purchased a building on January 1, 2009, at a cost of $364,000. Merton estimated that its life would be 25 years and its residual value would be $14,000.
On January 1, 2010, 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 six years. In 2011, Merton altered its corporate strategy dramatically. The company sold the building on April 1, 2011, for $392,000 in cash and relocated all operations to another state.
1. Determine the depreciation that should be on the income statement for 2009 and 2010.
2. Explain why the cost of the pollution control equipment was not expensed in 2010. 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 2010?