I. Plant Asset Cost; depreciation methods
Timberly Construction negotiates a lump-sum purchase of several assets from a company that is going out of business. The purchase is completed on January 1, 2013, at a total cash price of $900,000 for a building, land, land improvements and four vehicles. The estimated market values of the assets are building – $508,800; land – $297,600; land improvements – $28, 800 and four vehicles – $124,800. The company’s fiscal year ends on December 31.
Required:
1. Prepare a table to allocate the lump-sum purchase price to the separate assets purchased (round per cents to the nearest 1%). Prepare the journal entry to record the purchase.
2. Compute the depreciation expense for year 2013 on the building using the straight-line method, assuming a 15-year life and a $27,000 salvage value.
3. Compute the depreciation expense for year 2013 on the land improvements assuming a five-year life and double-declining-balance depreciation.
Analysis Component
4. Defend or refute this statement: Accelerated depreciation results in payment of less taxes over the asset’s life.
II. Asset Cost Allocation; straight-line-depreciation
In January 2013, Mitzu Co. pays $2,600,000 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 $644,000, with a useful life of 20 years and a $60,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $420,000 that are expected to last another 12 years with no salvage value. Without the buildings and improvements, the tract of the land is valued at $1,736,000. The company also incurs the following additional cost:
Cost to demolish Building 1…………………………………………. $ 328,400
Cost of additional land grading……………………………………… 175,400
Cost to construct new building (Building 3), having a useful life
of 25 years and a $392,000 salvage value…………………… 2,202,000
Cost of new land improvements (Land Improvements 2) near
Building 2 having a 20-year useful life and no salvage value.. 164,000
Required:
1. Prepare a table with the following column headings: Land, Building 2, Building 3, Land Improvements 1 and Land Improvements 2. Allocate the cost incurred by Mitzu to the appropriate columns and total each column (round percents to the nearest 1%).
2. Prepare a single journal entry to record all the incurred costs assuming they are paid in cash on January 1, 2013.
3. Using the straight-line method, prepare the December 31 adjusting entries to record depreciation for the 12 months of 2013when these assets were in use.
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