In January 2017, Mitzu Co. pays $2,600,000 for a tract of land with two building

Question

In January 2017, Mitzu Co. pays $2,600,000 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 $750,000, with a useful life of 20 years and a $85,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $360,000 that are expected to last another 12 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $1,890,000. The company also incurs the following additional costs:

Cost to demolish Building 1 $ 339,400
Cost of additional land grading 191,400
Cost to construct new building (Building 3), having a useful life of 25 years and a $400,000 salvage value 2,302,000
Cost of new land improvements (Land Improvements 2) near Building 2 having a 20-year useful life and no salvage value 168,000

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.

Allocation of purchase price Appraised Value Percent of Total Appraised Value x Total cost of acquisition = Apportioned Cost Land not attempted not attempted x not attempted = not attempted Building 2 not attempted not attempted x not attempted = not attempted Land Improvements 1 not attempted not attempted x not attempted = not attempted Totals $0 0% $0 Land Building 2 Building 3 Land Improvements 1 Land Improvements 2 Purchase Price not attempted not attempted not attempted not attempted not attempted Demolition not attempted not attempted not attempted not attempted not attempted Land grading not attempted not attempted not attempted not attempted not attempted New building (Construction cost) not attempted not attempted not attempted not attempted not attempted New improvements not attempted not attempted not attempted not attempted not attempted Totals $0 $0 $0 $0 $0

Explanation / Answer

Answer 1. Allocation of Purchase Price Appraised Value % of Total Appraised Value X Total Cost of Acquisition = Apportioned Cost Land        1,890,000.00 63.00% X    2,600,000.00 =            1,638,000.00 Building 2            750,000.00 25.00% X    2,600,000.00 =                650,000.00 Land Improvements 1            360,000.00 12.00% X    2,600,000.00 =                312,000.00 Total        3,000,000.00 100.00% X    7,800,000.00 =            2,600,000.00 Land Building 2 Building 3 Land Improvements 1 Land Improvements 2 Purchase Price          1,638,000.00           650,000.00                             -               312,000.00                                  -   Demolition              339,400.00                            -                               -                                 -                                    -   Land Grading              191,400.00                            -                               -                                 -                                    -   New Building (Construction Cost)                                -                              -          2,302,000.00                               -                                    -   New Improvements Cost                                -                              -                               -                                 -                  168,000.00 Total          2,168,800.00           650,000.00        2,302,000.00             312,000.00                168,000.00 Answer 2 & 3. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1/1/2017 Land    2,168,800.00 Building 2        650,000.00 Building 3    2,302,000.00 Land Improvements 1        312,000.00 Land Improvements 2        168,000.00 Cash    5,600,800.00 (record the assets purchased and cost incurred) 31-Dec-17 Depreciation Expense - Building 2          28,250.00 ($650,000 - $85,000) / 20 Years Accumulated Depreciation - Building 2          28,250.00 ($650,000 - $85,000) / 20 Years (record the depreciation exepsne) 31-Dec-17 Depreciation Expense - Building 3          76,080.00 ($2,302,000 - $400,000) / 25 Years Accumulated Depreciation - Building 3          76,080.00 ($2,302,000 - $400,000) / 25 Years (record the depreciation exepsne) 31-Dec-17 Depreciation Expense - Land Improvements 1          26,000.00 ($312,000 - $0) / 12 Years Accumulated Depreciation - Land Improvements 1          26,000.00 ($312,000 - $0) / 12 Years (record the depreciation exepsne) 31-Dec-17 Depreciation Expense - Land Improvements 2            8,400.00 ($168,000 - $0) / 20 Years Accumulated Depreciation - Land Improvements 2            8,400.00 ($168,000 - $0) / 20 Years (record the depreciation exepsne)

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