Question

Question 2 Gamma Ltd. acquired a tract of land with a building for $600,000. The closing statement indicated that the land’s assessed tax value was $400,000 and the building’s value was $200,000. The land was acquired as a site for Gamma's new office building and immediately after acquisition the building was demolished at a cost of $60,000. Gamma Ltd. constructed a new building, for $900,000 plus the following costs: Building design $ 20,000 Construction foreman salary 40,000 Imputed interest on retained earnings used during construction 30,000 Since Gamma has no debt, and a surplus of cash, all amounts were paid with cash.

a) Calculate the cost of the land. b) Calculate the cost of the building. c) Assume your answer to b) above was $1,000,000. Gamma Ltd. has a December 31 yearend. The building was completed and occupied on September 30, 2020. The estimated useful life of the building is 20 years, the residual value is estimated to be $100,000, and double-declining-balance depreciation is used. Calculate depreciation expense for 2020 and 2021. d) Assume your answer to b) above was $1,000,000. The building was completed and occupied on January 1, 2020. The estimated useful life of the building is 20 years and the residual value is estimated to be $100,000. On January 1, 2020, Gamma received a government grant of $400,000 to assist in the cost of the building. Prepare the journal entries required during 2020 related to the government grant and depreciation of the building. Assume straight-line amortization.

Answer 1

	Land	New building
Purchase cost	600000		(as the intent of buying the building was to demolish it so same is added to cost of land)
Demolition cost		60000	( demolition cost will be added to cost of building)
Construction cost		900000
Building design		20000
Foreman salary		40000
Imputed Interest		0	( as company did not incur any actual interest expenses)
	600000	1020000
a	Land	600000
b	Building	1020000

c)	double declining rate	=100/life of asset * 2
			=100/20*2
			10	%
		Book value	Depreciation	Net book value
	2020	1000000	100000	900000
			(1000000*40%*3/12)
	2021	900000	360000	540000
			(1000000*40%*9/12)+(600000*40%*3/12)

d)	We will reduce government grand amount from cost of asset.
	Depreciation
	Cost of asset	1000000
	Less: Grant	400000
	Less: Salvage	100000
	Depreciable value	500000
			Building	1000000
		01-Jan	Cash		1000000
			( to capitalise building)
		01-Jan	Cash
			Building	400000
			( to book government grant)		400000
		31-Dec	Depreciation expenses	25000
			Building		25000
			( to book depreciaton)