Question

Required information [The following information applies to the questions displayed below.] On January 1, Mitzu Co. pays a lump-sum amount of $2,750,000 for land, Building 1, Building 2, and Land Improvements 1. Building 1 has no value and will be demolished. Building 2 will be an office and is appraised at $678,500, with a useful life of 20 years and a $75,000 salvage value. Land Improvements 1 is valued at $472,000 and is expected to last another 16 years with no salvage value. The land is valued at $1,799,500. The company also incurs the following additional costs. $ 344,400 185,400 Cost to demolish Building 1 Cost of additional land grading Cost to construct Building 3, having a useful life of 25 years and a $402,000 salvage value Cost of new Land Improvements 2 having a 20-year useful life and no salvage value 2,242,000 173,000

Answer 1

In the first step taking Apprised values as base Total lumpsum amount of $ 27,50,000 has been apportioned between the assets purchased as below:

				(Amount in $)
1. Allocation of cost incurred by mitzu to the appropriate Asset
Allocation of purchase price	Apprised Value	% of Total Apprised Value	X	Total Cost of Acquisition	=	Apportioned Cost
Land	17,99,500	61%		27,50,000		16,77,500
Building 2	6,78,500	23%		27,50,000		6,32,500
Land Improvements 1	4,72,000	16%		27,50,000		4,40,000
Total	29,50,000	100%				27,50,000

considering the other costs given in the question total cost of Assets are calculated as below:

	Land	Building 2		Building 3		Land Improvements 1	Land Improvements 2
Purchase Price	16,77,500	6,32,500		-		4,40,000	-
Demolition	-	-		-		-	-
Land grading	-	-		-		1,85,400	-
New building	-	-		22,42,000		-	-
New improvements	-	-		-		-	1,73,000
Total	16,77,500	6,32,500		22,42,000		6,25,400	1,73,000

Journal Entry Work Sheet
1. Entry for Cost of Plant Assets paid in cash
Date	Journal Ledger					Debit	Credit
Jan-01	Land A/c		Dr		16,77,500
	Building 2 A/c			Dr		6,32,500
	Building 3 A/c			Dr		22,42,000
	Land Improvements 1		Dr		6,25,400
	Land Improvements 2		Dr		1,73,000
		To		Cash A/c			53,50,400
2. Entry year ended depreciation expense for Building 2
Date	Journal Ledger					Debit	Credit
Dec-31	Depreciation Expense A/c	Dr		27,875
		To		Building 2 A/c			27,875
Note: Calculation of Depreciation
Formula: Depreciable Value (i.e. cost less salvage value) / useful life of Asset
(6,32,500 - 75,000)/20 = 27,875
3. Entry year ended depreciation expense for Building 3
Date	Journal Ledger					Debit	Credit
Dec-31	Depreciation Expense A/c	Dr		73,600
		To		Building 3 A/c			73,600
Note: Calculation of Depreciation
Formula: Depreciable Value (i.e. cost less salvage value) / useful life of Asset
(22,42,000 - 402,000)/25 = 73,600
4. Entry year ended depreciation expense for Land Improvements 1
Date	Journal Ledger					Debit	Credit
Dec-31	Depreciation Expense A/c	Dr		39,088
		To		Building 2 A/c			39,088
Note: Calculation of Depreciation
Formula: Depreciable Value (i.e. cost less salvage value) / useful life of Asset
(6,25,400 - Nil)/16 = 39,088
5. Entry year ended depreciation expense for Land Improvements 2
Date	Journal Ledger					Debit	Credit
Dec-31	Depreciation Expense A/c	Dr		8,650
		To		Building 2 A/c			8,650
Note: Calculation of Depreciation
Formula: Depreciable Value (i.e. cost less salvage value) / useful life of Asset
(1,73,000 - Nil)/20 = 8,650