On January 1, 2021, LMT Inc. acquired a piece of land to construct a new office building. You have the following information about this transaction: Price of land $180,000 Tax on purchase of land 5% of price Legal fees to transfer property of land to LMT $4,500 Cost of demolishing old building on land 5,600 Income from sale of windows of old building demolished 500 Cost of new office building foundation 23,400 Cost of office building construction 460,000 Cost of insurance during construction 2,000 Cost to repair a piece of equipment used in the office building’s construction 1,000 Cost of annual insurance on office building after the construction is finished 6,000 LMT management decided to allocate the following amounts to the parts of the office building, and estimated the corresponding useful lives and residual values as follows: Allocated cost Useful life Residual value Windows $50,000 10 years $2,000 Furnace 24,000 10 years 0 Elevators 80,000 20 years 10,000 Building Rest of office building total cost 50 years 20,000 The building was ready for use on October 1, 2021, but LMT started using it on November 30th, 2021. LMT Inc. applies IFRS. Required Calculate the total cost of land and of the office building and prepare the appropriate journal entry assuming everything was paid for in cash. Calculate the total depreciation expense to be recorded on December 31, 2021 assuming the straight-line method is used for all property, plant and equipment.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
On January 1, 2021, LMT Inc. acquired a piece of land to construct a new office building. You have the following information about this transaction:
|
Price of land |
$180,000 |
|
Tax on purchase of land |
5% of price |
|
Legal fees to transfer property of land to LMT |
$4,500 |
|
Cost of demolishing old building on land |
5,600 |
|
Income from sale of windows of old building demolished |
500 |
|
Cost of new office building foundation |
23,400 |
|
Cost of office building construction |
460,000 |
|
Cost of insurance during construction |
2,000 |
|
Cost to repair a piece of equipment used in the office building’s construction |
1,000 |
|
Cost of annual insurance on office building after the construction is finished |
6,000 |
LMT management decided to allocate the following amounts to the parts of the office building, and estimated the corresponding useful lives and residual values as follows:
|
|
Allocated cost |
Useful life |
Residual value |
|
Windows |
$50,000 |
10 years |
$2,000 |
|
Furnace |
24,000 |
10 years |
0 |
|
Elevators |
80,000 |
20 years |
10,000 |
|
Building |
Rest of office building total cost |
50 years |
20,000 |
The building was ready for use on October 1, 2021, but LMT started using it on November 30th, 2021. LMT Inc. applies IFRS.
Required
- Calculate the total cost of land and of the office building and prepare the appropriate
journal entry assuming everything was paid for in cash. - Calculate the total
depreciation expense to be recorded on December 31, 2021 assuming the straight-line method is used for all property, plant and equipment.
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