Question

Problem 8-3A Asset cost allocation; straight-line depreciation LO C1, P1

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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 build 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		164,000

Problem 8-3A Part 3

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

3
Date	General Journal	Debit	Credit
Dec 31	Depreciation expense—Building 2	26,900		=(598000-60000)/20
	Accumulated depreciation—Building 2		26,900
Dec 31	Depreciation expense—Building 3	72,400		=(2202000-392000)/25
	Accumulated depreciation—Building 3		72,400
Dec 31	Depreciation expense—Land improvements 1	32,500		=390000/12
	Accumulated depreciation—Land improvements 1		32,500
Dec 31	Depreciation expense—Land improvements 2	8,200		=164000/20
	Accumulated depreciation—Land improvements 2		8,200

Workings:
Allocation of Purchase Price	Appraised Value	Percent of Total Appraised Value	x	Total Cost of Acquisition	=	Apportioned Cost
Land	1,736,000	62%	x	2,600,000	=	1,612,000
Building 2	644,000	23%	x	2,600,000	=	598,000
Land Improvements 1	420,000	15%	x	2,600,000	=	390,000
Totals	2,800,000	100%				2,600,000
	Land	Building 2		Building 3		Land Improvements 1	Land Improvements 2
Purchase Price	1,612,000	598,000		0		390,000	0
Demolition	328,400	0		0		0	0
Land grading	175,400	0		0		0	0
New building (Construction cost)	0	0		2,202,000		0	0
New improvements cost	0	0		0		0	164,000
Totals	2115800	598000		2202000		390000	164000