Question

On February 1, 2016, Jekel & Hyde Inc. purchased land and incurred other costs relative to the construction of a new warehouse. The costs related to the purchase of the land and the construction of the building are listed below: Purchase price of the land $231,250 Title insurance for the land $1,500 Legal fees to purchase land $1,000 Cost of razing an old building on the land to be used $8,500 for the construction of the warehouse Delinquent property taxes on the land owed by the seller $3,000 Cost of grading and filling the portion of the land on which $6,000 the warehouse will be placed. Architect fees $3,000 Building construction: Material $ 352,000 Labor $ 235,000 Insurance during construction $ 22,500 Utilities during construction $ 20,000 Avoidable Interest $ 2,500 Cost of constructing driveway $ 8,000 Cost of parking lot and fencing $12,000 Additional Information: a) To acquire the land at its fair market value and to construct the building, the company issued 25,000 of its $1 par value common stock. The stock is actively traded and its closing price on the date of issuance was $ 9.25 per share. b) Of the acres purchased, 80% of the land would be used for the construction of the warehouse and 20% of the acres would be held for future expansion or sale. c) In addition to the proceeds from the sale of the stock, cash-on-land was used for the balance of related expenditures. d) After 5 years of use, the company decided to dell the warehouse (including the land it was on). It sold for $1,000,000. The warehouse began operations on January 2, 2017. Over the 5 years, it had been depreciated properly, based on 10 yrs of useful life and a residual value of $365,000. The fencing, driveway and parking lot were depreciated based on 10 yrs useful life and no residue value. The company used the straight line method of depreciation. Required: Prepare the journal entries to record the economic events described above. You do not need to journalize the depreciation taken over the 5 yrs, which included the year of the sale.

Answer 1

Land and buliding need to be accounted separately even if they are acquired together. Land has an unlimited useful life where he buildings have limited useful life and therefore depreciable assets.

Journal entries

1. Land A/c Dr. $251250

To Cash A/c $251250

[Purchase of the land includes directly attribuable costs to the asset for its intended use]

2. Building A/c Dr. $652500

To Cash A/c   $652500

3.Issued 25000, $1 stock par value

Cash A/c Dr $25000

To cash A/c $25000

4. Cash A/c Dr $2500

To Interest $2500

Interest that can be avoided cannot be capitalised to the asset construction cost.

5. 80 % asset being used for warehouse and 20% for sale . The distinguishment has to be shown in the balancesheet i.e, land held for sale has to be seggregated into current asset .No Journal entry for the same.

6. Sale of the Asset

Cost of the warehouse = Cost of the land ( 80%)+ Cost of the building depreciated for 5 years

=201000+181375 (Cost of Building includes cash from sale of land(20%))

Cash A/c Dr. $1000000

To warehouse $563750

To Profit $436250