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Ex 2
Ex 2
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$472,770, with a useful life of 15 years and a $90,000 salvage value. A
lighted parking lot near Building B has improvements (Land Improvements B) valued
at$125,145 that are expected to last another six years with no salvage value. Without the
buildings and improvements, the tract of land is valued at $792,585. The company also
occurs the following additional costs.
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 InTech 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, 2011.
3. Applying the straight-line method, prepare the December 31 adjusting entries to record
depreciation for the 12 months of 2011 when these assets were in use.
KEY TERMS:
Journal Entry is a management entry that is written in the general journal. Each item
includes a debit and credit account that explains how the transactions were completed
and which accounts were involved. Assets and expenses are debit balances, whereas
liabilities, revenues, and equity are typically credited balances.
Lump-Sum Purchase Price is the single amount of money paid to purchase various
assets.
Plant Assets are also called property, plant, and equipment that are classified as
tangible assets and have a useful life of more than one year.
Land is the real property acquired by the firm either for the purpose of using it for
operations or treating it as part of their long-term investments.
Land Improvements are the costs incurred in preparing the land acquired for its
intended use.
Depreciation Expense is a non-cash expense in the income statement. We can define
that word as the amount of the asset's usefulness that is being deducted as time goes
by on a monthly or annual basis.
Straight-Line Method is the method used in getting the depreciation expense by
dividing the cost of the assets over their useful life resulting in the same depreciation
expense every period.
Cost are consist of the necessary expenses incurred in acquiring the assets and getting
them ready for their intended use.
Salvage Value is the estimated amount that the assets can be sold after their useful
life.
Useful Life is the period in which the plant assets exist and are used.
Requirement 1
We are asked to provide the table showing the allocated cost of plant assets.
Suppose that the InTech Co. acquired land containing two buildings. It has also incurred
different costs to prepare the land for its intended use.
Now here is the table showing the costs incurred for the land, building and land
improvements (LI).
For us to allocate the lump sum purchase price to the plant assets such as land, building B and
land improvement B, we have to get first the allocation of each plant asset from the total
lump sum paid, but before that, we have to get first the total appraisal of the plant assets.
Requirement 3
For us to journalize the adjustment for the depreciation of each plant asset, we have to get
first the expense.
Depreciation Expense
= ( $459,000 − $90,00015 ) / 15
= $369,00015 / 15
= $24,600
Hence, the depreciation expense of building B for 2011 is $24,600.
Building C
Depreciation Expense
= ( Cost − Salvage Value ) / Useful Life in Periods
= ( $1,356,000 − $295,50020 ) / 20
= $1,060,50020 / 20
= $53,025
Hence, the depreciation expense of building C for 2011 is $53,025.
Land Improvement B
Depreciation Expense
=( Cost − Salvage Value ) / Useful Life in Periods
= ( $121,500 − $0 ) / 6
=$121,500 / 6
=$20,250
Hence, the depreciation expense of land improvement B for 2011 is $20,250.
Land Improvement C
Depreciation Expense
=( Cost − Salvage Value ) / Useful Life in Periods
= ( $101,250−$0 ) / 10
= $101,250 / 10
=$10,125
Hence, the depreciation expense of land improvement C for 2011 is $10,125.