Problem 3 (6 marks)

Water Company constructed a building for use by the administration section of the company. The
completion date was January 1, 2023, and the construction cost was P16,800,000. The company
expected to remain in the building for the next 20 years, at which time the building would probably have
no real salvage value and have to be demolished. It is expected that demolition costs will amount to
P300,000. In June 2029, following a storm that wreaked vast destruction in the city, the roof of the
administration building was considered to be in poor shape so the company decided to replace it. On
January 1, 2030, a new roof was installed at a cost of P4,400,000. The new roof was of a different
material to the old roof, which was estimated to have cost only P2,800,000 in the original construction,
although at the time of construction it was thought that the roof would last for the 20 years that the
company expected to use the building. Because the company had spent the money replacing the roof, it
thought that it would delay construction of a new building, thereby extending the original life of the
building from 20 years to 25 years.