In January 2016, Mitzu Co. pays $2,700,000 for a tract of land with two building

Question

In January 2016, 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 $660,000, with a useful life of 20 years and a $80,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $600,000 that are expected to last another 20 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $1,740,000. The company also incurs the following additional costs: S 345,400 93,400 2,282,000 173,000 Cost to demolish Building1 Cost of additional land grading Cost to construct new building (Building 3), having a useful life of 25 years and a $400,000 salvage value Cost of new land improvements (Land Improvements 2) near Building 2, having a 20-year useful life and no salvage value

Explanation / Answer

Allocation of Purchase Price Appraised Value Percent of Total Appraised Value x Total Cost of Acquisition = Apportioned Cost Land $1,740,000 58% x $2,700,000 = $1,566,000 Building 2 660,000 22% x $2,700,000 = $594,000 Land Improvements 1 600,000 20% x $2,700,000 = $540,000 Totals $3,000,000 100% $2,700,000 Land Building 2 Building 3 Land Improvements 1 Land Improvements 2 Purchase Price $1,566,000 $594,000 $540,000 Demolition 345,400 0 Land grading 193,400 0 New building (Construction cost) 0 0 2282000 New improvements cost 0 0 173000 Totals $2,104,800 $594,000 $2,282,000 $540,000 $173,000 2 Date General Journal Debit Credit 1-Jan Land 2,104,800 Building 2 594,000 Building 3 2,282,000 Land improvements 1 540,000 Land improvements 2 173,000 Cash 5,693,800 3 Date General Journal Debit Credit 31-Dec Depreciation expense—Building 2 25,700 =(594000-80000)/20 Accumulated depreciation—Building 2 25,700 31-Dec Depreciation expense—Building 3 75,280 =(2282000-400000)/25 Accumulated depreciation—Building 3 75,280 31-Dec Depreciation expense—Land improvements 1 27,000 =540000/20 Accumulated depreciation—Land improvements 1 27,000 31-Dec Depreciation expense—Land improvements 2 8,650 =173000/20 Accumulated depreciation—Land improvements 2 8,650

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