In January 2013, Mitzu Co. pays $2,650,000 for a tract of land with two building
ID: 2965379 • Letter: I
Question
In January 2013, Mitzu Co. pays $2,650,000 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 $823,500, with a useful life of 20 years and an $75,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $305,000 that are expected to last another 10 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $1,921,500. The company also incurs the following additional costs:
Cost to demolish Building 1
$
346,400
Cost of additional land grading
189,400
Cost to construct new building (Building 3), having a useful life
of 25 years and a $402,000 salvage value
2,222,000
Cost of new land improvements (Land Improvements 2) near Building 2 having a 20-year useful life and no salvage value
173,000
Total costs
7,965,799
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
2. Prepare a single journal entry to record all the incurred costs assuming they are paid in cash on January 1, 2013.
Journal Entry Worksheet
Journal Entry Worksheet
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.
In January 2013, Mitzu Co. pays $2,650,000 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 $823,500, with a useful life of 20 years and an $75,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $305,000 that are expected to last another 10 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $1,921,500. The company also incurs the following additional costs:
Cost to demolish Building 1
$
346,400
Cost of additional land grading
189,400
Cost to construct new building (Building 3), having a useful life
of 25 years and a $402,000 salvage value
2,222,000
Cost of new land improvements (Land Improvements 2) near Building 2 having a 20-year useful life and no salvage value
173,000
Total costs
7,965,799
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
2. Prepare a single journal entry to record all the incurred costs assuming they are paid in cash on January 1, 2013.
Journal Entry Worksheet
Journal Entry Worksheet
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.
In January 2013, Mitzu Co. pays $2,650,000 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 $823,500, with a useful life of 20 years and an $75,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $305,000 that are expected to last another 10 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $1,921,500. The company also incurs the following additional costs:
Explanation / Answer
I would begin by allocating the $2,650,000 purchase price over the appraised or stated value of its components. Bldg 2 = 23%, Parking lot = 15%, Land = 62%.
The original cost allocated then is Land $1,643,000, Bldg 2 $609,500, and Parking lot for Bldg 1 $397,500, totaling $2,650,000.
Prepare a single journal entry to record these costs incurred by Fisk, all of which are paid in cash
Dr Land 348,056
Dr Building 1,369,300
Dr Land Improvements 86,434
Cr Cash 1,803,790
second question > Rayya Co. purchases and installs a machine on January 1, 2009, at a total cost of $94,100. Straight-line depreciation is taken each year for four years assuming an 8-year life and no salvage value. The machine is disposed of on July 1, 2013, during its fifth year of service.
Requirement 1:
Prepare entry to record the partial year's depreciation on July 1, 2013
94,100 / 8 = 11,762.50 depreciation per year
11,762.50 / 2 = 5,881.25 depreciation for one half year
Dr Depreciation Expense--Machine 5,881.25
Cr Accumulated Depreciation--Machine 5,881.25
Requirement 2:
Prepare entry to record the disposal under the assumption that the machine is sold for $43,639 cash.
(4 x 11,762.50) + 5,881.25 = 52,931.25 Accum Depr
Dr Cash 43,639
Dr Accumulated Depreciation--Machine 52,931.25
Cr Gain on Disposal 2,470.25
Cr Machine 94,100
Requirement 3:
Prepare entry to record the disposal under the assumption that Rayya receives an insurance settlement of $39,522 resulting from the total destruction of the machine in a fire.
Dr Cash 39,522
Dr Accumulated Depreciation--Machine 52,931.25
Dr Loss on Disposal 1,646.75
Cr Machine 94,100
third question > Horizon Company owns a building that appears on its prior year-end balance sheet at its original $500,000 cost less $425,000 accumulated depreciation. The building is depreciated on a straight-line basis assuming a 20-year life and no salvage value. During the first week in January of the current calendar year, major structural repairs are completed on the building at a $59,893 cost. The repairs extend its useful life for 7 years beyond the 20 years originally estimated.
Requirement 1:
Determine the building's age (plant asset age) as of the prior year-end balance sheet date.
500,000 / 20 = 25,000 depreciation per year
425,000 / 25,000 = 17 years
Total Bldg 3 = $342,400 + additional grading of $193,400 + construction cost of $2,282,000, or a total of $2,817,800.
Additional Land Imprvmts near Bldg 2 = $168,000
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