Question

In January 2017, ProTech Co. pays \(1,550,000 for a tract of land with two buildings. It plans to demolish Building A and build a new shop in its place. Building B will be a company office; it is appraised at \)482,800, with a useful life of 15 years and a \(99,500 salvage value. A lighted parking lot near Building B has improvements (Land Improvements B) valued at \)142,000 that are expected to last another five years with no salvage value. Without the buildings and improvements, the tract of land is valued at \(795,200. The company also incurs the following additional costs.

Cost to demolish Building A	\)122,000
Cost of additional land grading	174,500
Cost to construct new building (Building C), having a useful life of 20 years and a $258,000 salvage value	1,458,000
Cost of new land improvements (Land Improvements C) near Building C, having a 10-year useful life and no salvage value	103,500

Required

1. Prepare a table with the following column headings: Land, Building B, Building C, Land Improvements B, and Land Improvements C. Allocate the costs incurred by ProTech to the appropriate columns and total each column (round percents to the nearest 1%).
2. Prepare a single journal entry to record all 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.

Short answer

1. Total of purchase price$1,550,000
2. The cash is credited with $3,408,000
3. The depreciation is $10,350

Step-by-step solution

(1) Allocating the cost

Details	Land	Building B	Building C	Land improvement B	Land improvement C
Purchase price	$868,000	$527,000		$155,000
Demolition	$122,000
Land grazing	$174,500
Improvement (new)					$103,500
New building			$1,458,000
Total	$1,164,500	$527,000	$1,458,000	$155,000	$103,500

Note:

Calculating the purchase price: -

Allocation of purchase price	Appraised value	% Of total	Allotted cost
Land	$795,200	(795,200/1,420,000) *100 =56%	56% of $1,550,000 =$868,000
Building B	$482,800	(482,800/1,420,000) *100 =34%	34% of $1,550,000 =$527,000
Land improvement B	$142,000	(142,000/1,420,000) *100 =10%	10% of $1,550,000 =155,000
Total	$1,420,000	100%	$1,550,000

(2) Single journal entry to record all incurred costs assuming they are paid in cash on January 1, 2017

Jan, 01	Land	$1,164,500
	Building B	$527,000
	Building C	$1,458,000
	Land improvement B	$155,000
	Land improvement C	$103,500
	Cash		$3,408,000
	Record the purchase of plant assets

(3) calculating depreciation

Depreciation expense on building C: -

Dec, 31	Depreciation expense	$60,000
	Accumulated depreciation- building C		$60,000
	Record accumulated depreciation

Note:

$\begin{array}{rcl}depreciation& =& \frac{\cos t-salvagevalue}{usefullife}\\ & =& \frac{\$1,458,000-\$258,000}{20years}\\ & =& \frac{\$1,200,000}{20}\\ & =& \$60,000\end{array}$

Depreciation expense on land improvement C: -

Dec, 31	Depreciation expense	$10,350
	Accumulated depreciation- land improvement C		$10,350
	Record accumulated depreciation

Note:

$\begin{array}{rcl}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{=}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{u}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{103}\mathbf{,}\mathbf{500}}{\mathbf{10}\mathbf{}\mathbf{y}\mathbf{e}\mathbf{a}\mathbf{r}\mathbf{s}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{350}\end{array}$