Question

5. Kirby Corporation bought a building and the land on which it is situated for a total cash price of $429,000. The
company paid transfer costs to the lawyer of $5,000. Renovations done to the building totaled $52,000. The
land and building were independently appraised at market values of $150,000 and $350,000 before the
renovation respectively.
Required:
a) Allocate the cost of the property on the basis of the appraised values. Ensure you show your calculations.
b) Prepare the journal entry to record the purchase of the building and land, including all expenditures. Assume
that half the transaction was for cash and the other half for a short-term note payable. All purchases occurred
at the start of the fiscal year.
c) Compute depreciation of the building at the end of year one, using the straight-line method. Assume an
estimated useful life of 10 years and an estimated residual value of $32,000.
d) What would be the carrying value of the property (building and land) at the end of year 3?

Answer 1

Answer :-

a)

Working Note: Apportionment of cost of Land & Building
Land & Building Cost paid	$429,000
Transfer Cost	$5,000
Total Cost before Renovation cost	$434,000
Fair Market Value as per Appraisal for Land & Building	$500,000
Approtioned Cost for Land
434,000/500,000*150,000	$130,200
Approtioned Cost for Building
434,000/500,000*350,000	$303,800

.

	Apportioned Cost	Renovation Cost	Purchase Cost
Building	$      303,800	$        $52,000	$      355,800
Land	$        130,200		$        130,200
Total	$      434,000	$        $52,000	$      486,000

b)

Account Titles	Debit	Credit
Building	$    355,800
Land	$       130,200
Cash		$        486,000

c)
Depreciation = ($355,800 - 32,000) / 10 = $32,380.

d)
Carrying amount of Property at end of Year 2 = $486,000 - 32,380 x 2 = $907,240.