Question

1. HEMI purchased land and building for $280,000,000 on September 1, 2019. Accountant recorded this amount in the Land general ledger account because he did not know how to allocate the costs between land and building. Your research indicates that similar land could be purchased for $80,000,000 and the building was appraised at 240,000,000 for insurance purposes. HEMI’s management purchased the building knowing that it needed improvements of $3,000,000 to make it usable for HEMI’s needs. Accountant recorded these improvements in the Repairs and Maintenance expense general ledger account. Management expects to sell the land for $200,000,000 and building for 20,000,000 at the end of its useful life of 20 years. HEMI’s management want to use the cost method of valuing capital assets in order to save on the costs of appraising capital assets. The Accountant wants you to:

1. Allocate the $280,000,000 cost between land and building (show your calculations). Provide an adjusting journal entry to transfer the building costs to the proper account.
2. Recommend, with justification, the appropriate accounting treatment for the $3,000,000 of building improvement costs. Provide an adjusting journal entry, if any, to properly account for the building improvement costs.
3. Recommend, with justification, the appropriate depreciation method for building. Compute the depreciation expense for the year-ended December 31, 2019 showing your calculations. Provide a depreciation expense adjusting journal entry.

Answer 1

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a) Allocation of land & building cost Price of similar Land = $80,000,000 Building cost as per o insurance 2 $240,000 OBO Total = $ 320000000 Consolidated purchase price - $ 280,000000 Allocation Rabio : 80000000 :240000000 On : 8:24 = 32 Land price : 70000000 (280000,000x3) Becilding price = 10000000 (7800000@ox ) 32 Adjusting Jouanal Entry Accountant currently recorded $280000000 in "land" Date Particular Debit Credit Sep 1 Building all lol Dra1000coco 2019 To land 210000000 (To record allocation of beeilding cost which was previosly recorded PD "land"

b) Recommendation on building improvement cost The major improvement cost which is made at the time of purchase shall be "capitalisedàs management coas aware of need of eaprovement! In The accountant considered this cost as "expenses revenue expense" Hence the adjusting entry must be passed to transfer that cost to "Building " (capitalised) Journal Entry and Date/ Particulars Debil Credit SINO Building Der 3000000 To sepains revenue 3000000 expense (To record transfer from revenue expense to capitalise, major experise on building).

c) Depreciation method: 7 G Land is not dopsociable asset. Hence no depreciation charged. . Ahora Building ige depreciable asset There are many depreciation methods followed, for fostanice, straight-line- method, double decline method etc er the most suitable method for building is “ straight-line method" as there building is generally cesed in same way throughout the life. The Life of building wis expected 20 years in this question. The depreciation wig, a 10 Value of building $210,000,000 Add: major improvement. $3000.000 - Total cost $213000000 (6) life of buildinge 20 year Less's Residual value ($ 20000000) cost $193000000 ( Life of building 20 years. Depreciation per year = $9650000 (193000,000/20 years)