Question

Question: P9-36B Determining asset cost and recording partial-year depreciation

Safe Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:

a	Purchase price of three acres of land	$86,000
b	Delinquent real estate taxes on the land to be paid by safe parking	6,300
c	Additional dirt and earth removing	8,400
d	Title insurance and the land acquisition	3,400
e	Fence around the boundary of the property	9,600
f	Building permit for building	900
g	Architect’s fee for design of building	20,100
h	Signs near the front of property	9,000
i	Material used to construct the building	217,000
J	Labor to construct the building	172,000
k	Interest cost on construction loan for the building	9,500
l	Parking lots on the property	29,400
m	Lights for parking lots	11,600
n	Salary of construction supervisor(80% to building; 20% to parking lot and concrete walks)	80,000
o	Furniture	11,700
p	Transportation of furniture from seller to the building	1,900
q	Additional fencing	6,900

Safe Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value.

Requirements

1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.

2. All construction was complete and the assets were placed in service on September 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar.

Short answer

Answer

1. Cost of different assets:

   Land	$104,100
   Land improvement	$82,500
   Building	$483,500
   Furniture	$13,600

2. 1. Partial depreciation of different assets:

      Land improvement	$5,500
      Building	$4,029
      Furniture	$453

Step-by-step solution

Definition of Depreciation

The business entity spreads the cost of acquiring fixed assets over the time period it is useful. Such a process of spreading the cost is known as depreciation. It can be done using various available methods.

Calculation of cost of various assets

Cost of land:

Particular	Amount ($)
Purchase price of three acres of land	$86,000
Delinquent real estate taxes on the land to be paid by discount parking	6,300
Additional dirt and earthmoving	8,400
Title insurance on the land acquisition	3,400
Total cost of land	$104,100

Cost of land improvements:

Particular	Amount ($)
Fencing around land	$9,600
Sign near the front of the property	9,000
Parking lot	29,400
Lights for parking lot	11,600
Salary of construction supervisor	16,000
Additional fencing	6,900
Total cost of land improvement	$82,500

Cost of building:

Particular	Amount ($)
Building permit for building	$900
Architect fees	20,100
Material to construct building	217,000
Labor to construct building	172,000
Interest cost on construction loan	9,500
Salary of construction supervisor	64,000
Total cost of building	$483,500

Cost of furniture:

Particular	Amount ($)
Furniture	$11,700
Transportation cost of furniture	1,900
Total cost of furniture	$13,600

Calculation of Partial Year Depreciation Expense for year Ended 31st Dec

Working note:

1. Land improvement depreciation:

$$\begin{gathered} Depreciationexpenses=\frac{Cost}{Usefullife}\times \frac{4}{12} \\ =\frac{\$82,500}{15}\times \frac{4}{12} \\ =\$5,500 \end{gathered}$$

2. Building:

$$\begin{gathered} Depreciationexpenses=\frac{Cost}{Usefullife}\times \frac{4}{12} \\ =\frac{\$483,500}{40}\times \frac{4}{12} \\ =\$4,029 \end{gathered}$$

3.Furniture:

$$\begin{gathered} Depreciationexpenses=\frac{Cost}{Usefullife}\times \frac{4}{12} \\ =\frac{\$13,600}{10}\times \frac{4}{12} \\ =\$453 \end{gathered}$$