Question

Question: In January 2017, Mitzu Co. pays $2,600,000 for a tract of land with two buildings on it. It plans to demolish

Building 1 and building a new store in its place. Building 2 will be a company office; it is appraised at

$644,000, with a useful life of 20 years and a $60,000 salvage value. A lighted parking lot near Building

1 has improvements (Land Improvements 1) valued at $420,000 that are expected to last another 12 years

with no salvage value. Without the buildings and improvements, the tract of land is valued at $1,736,000.

The company also incurs the following additional costs:

Cost to demolish Building 1 $ 328,400

Cost of additional land grading 175,400

Cost to construct new building (Building 3), having a useful life

of 25 years and a $392,000 salvage value. 2,202,000

Cost of new land improvements (Land Improvements 2) near Building 2

having a 20-year useful life and no salvage value of 164,000

 

Required

1. Prepare a table with the following column headings: Land, Building 2, Building 3, Land Improvements

1, and Land Improvements 2. Allocate the costs incurred by Mitzu to the appropriate columns and

total each column (round percentages to the nearest 1%).

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

Step 1: Definition of depreciation

Depreciation means the reduction in the value of the machinery due to constant use. Depreciation is a non-monetary expense that allows the company to avail of tax benefits.

Step 2: Preparation of table

Land

Building 2

Building 3

Land

Improvements 1 Land

Improvements 2

Purchase price* $1,612,000 $598,000 $390,000

Demolition $328,400

Land grading $175,400

New building $2,202,000

New improvements _________ _______ _________ _______ $164,000

Totals $2,115,800 $598,000 $2,202,000 $390,000 $164,000

 

*Allocation of purchase price Appraised Value Percent of Total Apportioned Cost**

Land $1,736,000 62% $1,612,000

Building 2 $644,000 23 $598,000

Land Improvements 1 $420,000 15 $390,000

Totals $2,800,000 100% $2,600,000

 

Step 3: Single journal entry to record all the costs

2017 Particulars Debit Credit

Jan.1 Land $2,115,800

Building 2 $598,000

Building 3 $2,202,000

Land Improvements $390,000

Land Improvements 2 $164,000

Cash $5,469,800

(Record costs of plant assets.)

 

Step 4: Journal entries for depreciation

2017 Particulars Debit Credit

Dec. 31 Depreciation Expense-Building 2 $26,900

Accumulated Depreciation-Building 2 $26,900

(Record depreciation)

31 Depreciation Expense-Building 3 $72,400

Accumulated Depreciation-Building 3 $72,400

(Record depreciation)

31 Depreciation Expense-Land Improvement 1 $32,500

Accumulated Depreciation-Land Improvement 1 $32,500

(Record depreciation)

31 Depreciation Expense-Land Improvement 2 $8,200

Accumulated Depreciation-Land Improvement 2 $8,200

(Record depreciation)

 

The total cost of the lant improvement 2 is $164,000.

The cash account is credited with $5,469,800.

The accumulated depreciation account of land improvement 2 is debited by $8,200.