Question

In January 2017, Mitzu Co. pays $2,700,000 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 $854,000, with a useful life of 20 years and a $90,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $427,000 that are expected to last another 14 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $1,769,000. The company also incurs the following additional costs:

Cost to demolish Building 1	$	345,400
Cost of additional land grading		187,400
Cost to construct new building (Building 3), having a useful life of 25 years and a $398,000 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		178,000

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.

• Record the year-end adjusting entry for the depreciation expense of Building 2.

• 2

  Record the year-end adjusting entry for the depreciation expense of Building 3.

• 3

  Record the year-end adjusting entry for the depreciation expense of Land Improvements 1.

• 4

  Record the year-end adjusting entry for the depreciation expense of Land Improvements 2.

Answer 1

3
Date	General Journal	Debit	Credit
Dec 31	Depreciation expense—Building 2	33,300		=(756000-90000)/20
	Accumulated depreciation—Building 2		33,300
Dec 31	Depreciation expense—Building 3	72,160		=(2202000-398000)/25
	Accumulated depreciation—Building 3		72,160
Dec 31	Depreciation expense—Land improvements 1	27,000		=378000/14
	Accumulated depreciation—Land improvements 1		27,000
Dec 31	Depreciation expense—Land improvements 2	8,900		=178000/20
	Accumulated depreciation—Land improvements 2		8,900
Workings:
Allocation of Purchase Price	Appraised Value	Percent of Total Appraised Value	x	Total Cost of Acquisition	=	Apportioned Cost
Land	1,769,000	58%	x	2,700,000	=	1,566,000
Building 2	854,000	28%	x	2,700,000	=	756,000
Land Improvements 1	427,000	14%	x	2,700,000	=	378,000
Totals	3,050,000	100%				2,700,000
	Land	Building 2		Building 3		Land Improvements 1	Land Improvements 2
Purchase Price	1,566,000	756,000		0		378,000	0
Demolition	345,400	0		0		0	0
Land grading	187,400	0		0		0	0
New building (Construction cost)	0	0		2,202,000		0	0
New improvements cost	0	0		0		0	178,000
Totals	2,098,800	756,000		2202000		378000	178000