Question

In January 2017, Mitzu Co. pays $2,750,000 for a tract of land with two buildings on it. It plans to demolish Building 1 and build a new store in its place. Building 2 will be a company office; it is appraised at $690,000, with a useful life of 20 years and a $75,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $540,000 that are expected to last another 18 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $1,770,000. The company also incurs the following additional costs: Cost to demolish Building 1 $ 341,400 Cost of additional land grading 191,400 Cost to construct new building (Building 3), having a useful life of 25 years and a $400,000 salvage value 2,242,000 Cost of new land improvements (Land Improvements 2) near Building 2 having a 20-year useful life and no salvage value 173,000 Required: 1. Allocate the costs incurred by Mitzu to the appropriate columns and total each column. 2. Prepare a single journal entry to record all the incurred costs assuming they are paid in cash on January 1, 2017. 3. Using the straight-line method, prepare the December 31 adjusting entries to record depreciation for the 12 months of 2017 when these assets were in use.

Answer 1

SOLUTION

1. Allocation of costs:

Allocation of purchase price	Appraised Value ($)	Percent of Total Appraised Value (A)	Total cost of acquisition ($) (B)	Apportioned cost ($) (A*B)
Land	1,770,000	59%	2,750,000	1,622,500
Building 2	690,000	23%	2,750,000	632,500
Land Improvements 1	540,000	18%	2,750,000	495,000
Total	3,000,000	100%		2,750,000

	Land	Building 2	Building 3	Land Improvements 1	Land Improvements 2
Purchase price	1,622,500	632,500		495,000
Demolition	341,400
Land grading	191,400
New building (construction cost)			2,242,000
New improvements					173,000
Total	2,155,300	632,500	2,242,000	495,000	173,000

2. Journal entry:

Date	Account Titles and Explanations	Debit ($)	Credit ($)
January 1, 2017	Land	2,155,300
	Land Improvements 1	495,000
	Land Improvements 2	173,000
	Building 2	632,500
	Building 3	2,242,000
	Cash		5,697,800
	(To record cost of plant assets paid in cash)

3.

Date	Account Titles and Explanations	Debit ($)	Credit ($)
Dec.31,2017	Depreciation expense	137,705
	Accumulated depreciation-Land improvement 1		27,500
	Accumulated depreciation-Land improvement 2		8,650
	Accumulated depreciation-Building 2		27,875
	Accumulated depreciation-Building 3		73,680
	(To record depreciation expense for 2017)

Accumulated depreciation-Land improvement 1 = 495,000/ 18 years = 27,500

Accumulated depreciation-Land improvement 2 = 173,000 / 20 years = 8,650

Accumulated depreciation-Building 2 = (632,500-75,000)/ 20 years = 27,875

Accumulated depreciation-Building 3 = (2,242,000 - 400,000) / 25 years = 73,680