In January 2011, a Keona Company pays $2,800,000 for a tract of land with two bu
ID: 2353043 • Letter: I
Question
In January 2011, a Keona Company pays $2,800,000 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 $641,300 with a useful life of 20 years and $80,000 salvage value. A lighted parking lot near building 1 has improvements (Land Improvements) valued at $408,100 that are expected to last another 14 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $1,865,600. The company also incurs the following additional costs:Cost to demolish building 1 $422,600
Cost of additional land grading $167,200
Cost to construct a new building (building3), having a useful life of 25 years and a $390,000 salvage value $2,019,000
Cost of new land improvements (Land Improvements 2) near building 2 having a 20-year useful life and no salvage value $158,000
Required
3. Using the straight line method prepare the December 31st adjusting entries to record depreciation for the 12 months of 2011 when these assets were in use.
Explanation / Answer
Appraised value of Assets Land $1,865,600 Building $641,300 Land Improvements $408,100 Total appraised value = $2,915,000 at time of purchase Cost Allocated to each asset at time of purchase Land (1,865,600 / 2,915,000) x 2,800,000 = $1,792,000 Building (2) (641,300 / 2,915,000) x 2,800,000 = $616,000 Land Improvements (1) (408,100 / 2,915,000) x 2,800,000 = $392,000 Cost to demolish Building 1 $ 422,600 Add to Land Cost of additional land grading 167,200 Add to Land Cost to construct new building (Building 3), having a useful life of 25 years and a $390,100 salvage value 2,019,000 Add $2,019,000 to Building (3) Cost of new land improvements (Land Improvements 2) near Building 2 having a 20-year useful life and no salvage value 158,000 Add to Land Improvements (2)
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