Question

May I know what are the journal entries required for this? No solutions involve revaluation reserve are greatly appreciated because it was not taught to us yet. Thanks.

1 Jan Purchased an existing factory building with the surrounding land for $24,700,000 cash. Stamp duty was at 10% of the purchase price, estate agent commission was 1% of the purchase price, and $30,000 had to be spent to remove the debris and abandoned structures found on the estate. The company borrowed a 7%, 5-year, $10,000,000 note, to finance this acquisition and paid the remaining costs in cash. An appraisal of the land and building at the time of purchase indicated that the market value of the land was $20,000,000 and the market value of the building was $10,000,000. Land has an indefinite useful life whereas the building is expected to have a useful life of 20 years. Residual value for building is estimated to be $1,000,000. The building is to be depreciated using the straight method.

Answer 1

Land and buildings must be seperately recognised in books as Land is non Depreciable asset and Building is depreciated over its useful life.

Total Cost to be Capitalized

= Purchase Consideration + Stamp duty + Commission + cost of removing unwanted buildings etc

= $24.7 million + 10% of $24.7 million + 1% of $24.7 million + $30,000

= $27,447,000

Interest cost is not capitalized as the asset is ready for its intended use on the date of purchase (not a qualifying asset)

This cost has to be bifurcated between the Land and Building. This is done on the basis of their individual market values

Cost apportioned to Land = $27,447,000 x $10 million/$30 million

= $9,149,000

Cost apportioned to Building = $27,447,000 x $20 million/$30 million

= $18,298,000

Depreciation of building = (Cost - Residual value)/Life

= ($18,298,000-$1million/20

= $864,900 per year

Journal Entries

At the time of acquisition

Land $9,149,000

Building $18,298,000

Cash $17,447,00

7% note payable $10,000,000

(Land and building purchased partly by paying in cash and partly by issuing 7% 5 year note payable. The stamp duty, commision and cost of removing unwanted structures also capitalized)

At the time of paying interest

Interest expense $70,000

Cash $70,0000

Annual depreciation

Depreciation expense $864,900

Accumulated depreciation $864,900

Note :

In this solution, we have added the cost of removing unwanted structures to both land and building. There is also second school of thought which suggests to capitalise such costs only to land. In such case the cost appropriation woudl vary and also the depreciation amount will change.

As we do not know the country of accounting and thus their GAAP, we applied the the cost of removal to both land and building.