Question

Wildhorse Company purchased land and a building on April 1, 2019, for $369,600. The company paid $110,400 in cash and signed a 5% note payable for the balance. At that time, it was estimated that the land was worth $145,000 and the building, $224,600. The building was estimated to have a 25-year useful life with a $35,000 residual value. The company has a December 31 year end, prepares adjusting entries annually, and uses the straight-line method for buildings; depreciation is calculated to the nearest month. The following are related transactions and adjustments during the next three years. 2019 Dec. 31 Recorded annual depreciation. 31 Paid the interest owing on the note payable. 2020 Feb. 17 Paid $225 to have the furnace cleaned and serviced. Dec. 31 Recorded annual depreciation. 31 Paid the interest owing on the note payable. 31 The land and building were tested for impairment. The land had a recoverable amount of $116,000 and the building, $235,000. 2021 Jan. 31 Sold the land and building for $310,000 cash: $110,000 for the land and $200,000 for the building. Feb. 1 Paid the note payable and interest owing.

Answer 1

Solution.

Date	Account Title	Debit	Credit
2019	Land	$   145,000
Apr-01	Building	$   224,600
	Cash		$ 110,400
	Notes Payable		$ 259,200
The Above entry is not required. It is recorded for convinience purpose only.
Adjusting Journal Entries
Date	Account Title	Debit	Credit
2019
Dec-31	Depreciation Expense	$       5,688
	Accumulated Depreciation-Building		$      5,688
	To record Dep. Expens for 9 months
	(224,600 - 35,000) x 0.04 x 9/12 =5,688
Dec-31	Interest Expense	$       9,720
	Cash		$      9,720
	To record interest Expens for 9 months
	259,200 x 0.05 x 9/12 = 9,720
2020
Feb-17	No Adjusting Entry Required furnace clean
Dec-31	Depreciation Expense	$       7,584
	Accumulated Depreciation-Building		$      7,584
	To record annual Depreciation Expense
	(224,600 - 35,000) x 0.04 x 1 = 7,584
Dec-31	Interest Expense	$      12,960
	Cash		$    12,960
	To record annual interest expense
	259,200 x 0.05 x 1 = 12,960
Dec-31	No Impairment on building
	The Market value is more than carrying value
Dec-31	Loss on Impairment	$      29,000
	Land		$    29,000
	To record impairment loss
	Market value 116,000 is less by 29,000 carryin value
2021
Jan-31	Cash	$   110,000
	Loss on Sale	$       6,000
	Land		$ 116,000
	To recod sale of land
Jan-31	Depreciation Expense	$          632
	Accumulated Depreciation-Building		$         632
	(224,600 - 35,000) x 0.04 x 1/12 = 632
	To record Depreciation Expense of Jan.
Jan-31	Cash	$   200,000
	Accumulated Depreciation	$      13,904
	Loss on Sale	$      10,696
	Building		$ 224,600
	To record sale of building
Feb-01	Interest Expense	$       1,080
	Cash		$      1,080
	(259,200 x 0.05 x 1/12 )= 1,080
	To record payament of interes for Jan.
Feb-01	Notes Payable	$   259,200
	Cash		$ 259,200
	To record payment of notes payable

Note: 1

The Straight Line Depreciation Rate = 1/25 = 0.04 or 4% per year.