In January 2013, Mitzu Co. pays $2,800,000 for a tract of land with two building
ID: 2378889 • Letter: I
Question
In January 2013, Mitzu Co. 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 $600,000, with a useful life of 20 years and an $80,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $630,000 that are expected to last another 21 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 $347,400
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 2,242,000
Cost of new land improvements (Land Improvements 2) near Building 2 having a 20-year useful life and no salvage value 178,000
1. 1. Allocate the costs incurred by Mitzu to the appropriate columns and total each column.
Allocation of purchase price
Appraised value
Percent of total appraized value
X
Total cost of acquisition
=
Apportioned cost
Land
x
=
Building 2
x
=
Land improvements 1
x
=
Total
Land
Building 2
Building 3
Land Improvements 1
Land Improvements 2
Purchase Price
Demolition
Land grading
New Building (Construction cost)
New Improvements cost
Totals
1. Prepare a single journal entry to record all the incurred costs assuming they are paid in cash on January 1, 2013.
a. Record the costs of the plant assets.
2. Using the straight-line method, prepare the December 31 adjusting entries to record depreciation for the 12 months of 2013 when these assets were in use.
a. Record the costs of the plant assets.
b. Record the year-end adjusting entry for the depreciation expense of Building 3
c. Record the year-end adjusting entry for the depreciation expense of Land Improvements 1.
d. Record the year-end adjusting entry for the depreciation expense of Land Improvements 2
Allocation of purchase price
Appraised value
Percent of total appraized value
X
Total cost of acquisition
=
Apportioned cost
Land
x
=
Building 2
x
=
Land improvements 1
x
=
Total
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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