Question

(8-3)

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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 $678,500, with a useful life of 20 years and a $75,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $501,500 that are expected to last another 17 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $1,770,000. The company also incurs the following additional costs:

Cost to demolish Building 1	$	341,400
Cost of additional land grading		187,400
Cost to construct new building (Building 3), having a useful life of 25 years and a $402,000 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		173,000

Required:

1. Allocate the costs incurred by Mitzu to the appropriate columns and total each column.

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

Allocation of costs:
Allocation of purchase price	Appraised Value	Percent of Total Appraised Value	x	Total cost of acquisition	=	Apportioned cost
Land	$17,70,000.00	60%	x	$27,00,000.00	=	$16,20,000.00
Building 2	$6,78,500.00	23%	x	$27,00,000.00	=	$6,21,000.00
Land Improvements 1	$5,01,500.00	17%	x	$27,00,000.00	=	$4,59,000.00
Totals	$29,50,000.00	100%				$27,00,000.00

	Land	Building 2		Building 3		Land Improvements 1	Land Improvements 2
Purchase price	$16,20,000.00	$6,21,000.00				$4,59,000.00
Demolition	$3,41,400.00
Land grading	$1,87,400.00
New building (construction cost)				$22,02,000.00
New improvements							$1,73,000.00
Totals	$21,48,800.00	$6,21,000.00		$22,02,000.00		$4,59,000.00	$1,73,000.00

2. Journal entry:
Date	Account Titles and Explanations	Debit	Credit
Jan. 1, 2017	Land	$21,48,800.00
	Land Improvements 1	$4,59,000.00
	Land Improvements 2	$1,73,000.00
	Building 2	$6,21,000.00
	Building 3	$22,02,000.00
	Cash		$56,03,800.00
	(To record cost of plant assets paid in cash)

3. Adjusting journal entry:
Date	Account Titles and Explanations	Debit	Credit
Dec. 31, 2017	Depreciation expense	$1,34,950.00
	Accumulated depreciation-Land improvement 1 (459000/17)		$27,000.00
	Accumulated depreciation-Land improvement 2 (173000/20)		$8,650.00
	Accumulated depreciation-Building 2 ($621000 - $75000) / 20 years		$27,300.00
	Accumulated depreciation-Building 3 ($2202000 - $402000) / 25 years = $1800000 / 25		$72,000.00
	(To record depreciation expense for 2017)