Chapter 10, Problem 3APSA

Requirement 1-

To determine

To compute:

The table showing the cost incurred and its allocation.

Answer to Problem 3APSA

Solution:

First we need to calculate apportionment of purchase price-

Allocation of purchase price	Appraised value	Percentage	Allocated costs
Land	1,736,000	62%	1,612,000
Building 2	644,000	23%	598,000
Land Improvement 1	420,000	15%	390,000
Total	2,800,000	100%	2,600,000

Table showing cost incurred-

Details	Land	Building 2	Building 3	Land Improvement 1	Land Improvement 2
Purchase price	1,612,000	598,000		390,000
Demolition	328,400
Land grading	175,400
Improvements (new)					164,000
New building			2,202,000
Total	2,115,800	598,000	2,202,000	390,000	164,000

Explanation of Solution

Given,
Appraised value

• Land - $1,736,000
• Building 2 - $644,000
• Land Improvement 1 - $420,000
  

  $\begin{array}{l}TotalAppraisedvalue=Land+Building\text{ 2}+LandImprovement1\hfill \\ TotalAppraisedvalue=\$1,736,000+\$644,000+\$420,000\hfill \\ TotalAppraisedvalue=\$2,800,000\hfill \end{array}$

Now, we need to calculate the percentage allocated to each asset-

  $\begin{array}{l}\begin{array}{l}PercentageofLand=\frac{Appraisedvalueofland}{TotalAppraisedvalue}\hfill \\ PercentageofLand=\frac{\$1,736,000}{\$2,800,000}\hfill \end{array}\\ PercentageofLand=62\%\end{array}$

  $\begin{array}{l}\begin{array}{l}PercentageofBuilding\text{ 2}=\frac{AppraisedvalueofBuilding\text{ 2}}{TotalAppraisedvalue}\hfill \\ PercentageofBuilding\text{ 2}=\frac{\$644,000}{\$2,800,000}\hfill \end{array}\\ PercentageofBuilding\text{ 2}=23\%\end{array}$

  $\begin{array}{l}\begin{array}{l}PercentageofLandImprovement\text{ 1}=\frac{AppraisedvalueofLandImprovement\text{ 1}}{TotalAppraisedvalue}\hfill \\ PercentageofLandImprovement\text{ 1}=\frac{\$420,000}{\$2,800,000}\hfill \end{array}\\ PercentageofLandImprovement\text{ 1}=15\%\end{array}$

Allocation of purchase price-
Given,

• Purchase price = $2,600,000

  $\begin{array}{l}PurchasepriceallocatedtoLand=Purchaseprice\times PercentageallocatedtoLand\hfill \\ PurchasepriceallocatedtoLand=\$2,600,000\times 62\%\hfill \\ PurchasepriceallocatedtoLand=\$1,612,000\hfill \end{array}$

  $\begin{array}{l}PurchasepriceallocatedtoBuilding\text{ 2}=Purchaseprice\times PercentageallocatedtoBuilding\text{ 2}\hfill \\ PurchasepriceallocatedtoBuilding\text{ 2}=\$2,600,000\times 23\%\hfill \\ PurchasepriceallocatedtoBuilding\text{ 2}=\$598,000\hfill \end{array}$

  $\begin{array}{l}PurchasepriceallocatedtoLandImprovement\text{ 1}=Purchaseprice\times PercentageallocatedtoLandImprovement\text{ 1}\hfill \\ PurchasepriceallocatedtoLandImprovement\text{ 1}=\$2,600,000\times 15\%\hfill \\ PurchasepriceallocatedtoLandImprovement\text{ 1}=\$390,000\hfill \end{array}$

Calculation of cost incurred-
Given,

• Purchase price of Land - $1,612,000 (Calculated above)
• Purchase price of Building B- $598,000 (Calculated above)
• Purchase price of Land Improvement B - $390,000 (Calculated above)
• Demolition − $328,400
• Land grading - $175,400
• Improvements- $164,000
• New building - $2,202,000
Total cost of Land −

  $\begin{array}{l}TotalcostofLand=Purchaseprice+Demolition+Landgrading\hfill \\ TotalcostofLand=\$1,612,000+\$328,400+\$175,400\hfill \\ TotalcostofLand=\$2,115,800\hfill \end{array}$

Conclusion

Thus, table for allocation of costs incurred is prepared.

Requirement 2:

To determine

To prepare:

Journal entry to record costs incurred.

Answer to Problem 3APSA

Solution:

Date	Accounts titles and Description	Debit ($)	Credit ($)
Jan.1,2015	Land	2,115,800
	Building 2	598,000
	Building 3	2,202,000
	Land Improvement 1	390,000
	Land Improvement 2	164,000
	Cash		5,469,800
	(To record plant assets purchased in cash)

Explanation of Solution

Amount of total cash payment is calculated below-

  $\begin{array}{l}\begin{array}{l}Totalcashpayment=Land+Building\text{ 2}+Building\text{ 3}+LandImprovement\text{ 1}+LandImprovement\text{ 2}\hfill \\ Totalcashpayment=\$2,115,800+\$598,000+\$2,202,000+\$390,000+\$164,000\hfill \end{array}\\ Totalcashpayment=\$5,469,800\end{array}$

In the above entry, cash account is credited as there is reduction in current assets and purchase of assets is increase in assets so accounts are debited.

Conclusion

Thus, journal entry to record all costs incurred is passed.

Requirement 3-

To determine

To prepare:

Adjusting journal entry to record depreciation.

Answer to Problem 3APSA

Solution:

S. No.	Date	Accounts titles and Description	Debit ($)	Credit ($)
1	Dec.31,2015	Depreciation-Building 2	26,900
		Accumulated Depreciation		26,900
		(To record depreciation on Building 2)
2	Dec.31,2015	Depreciation-Building 3	72,400
		Accumulated Depreciation		72,400
		(To record depreciation on Building 3)
3	Dec.31,2015	Depreciation-Land Improvement 1	32,500
		Accumulated Depreciation		32,500
		(To record depreciation on Land Improvement 1)
4	Dec.31,2015	Depreciation-Land Improvement 2	8,200
		Accumulated Depreciation		8,200
		(To record depreciation on Land Improvement 2)

Explanation of Solution

Entry 1- Calculation of Depreciation expense-
Given,

• Scrap value = $60,000
• Estimated useful life = 20 years
• Cost = $598,000 (calculated in Req.1)

  $\begin{array}{l}Depreciation=\frac{\left(Cost–ScrapValue\right)}{Estimatedusefullife}\hfill \\ Depreciation=\frac{\left(\$598,000-\$60,000\right)}{\text{20 }years}\hfill \\ Depreciation=\frac{\$538,000}{\text{20 }years}\hfill \\ Depreciation=\$26,900\hfill \end{array}$

Entry 2- Calculation of Depreciation expense-
Given,

• Scrap value = $392,000
• Estimated useful life = 25 years
• Cost = $2,202,000 (calculated in Req.1)

  $\begin{array}{l}Depreciation=\frac{\left(Cost–ScrapValue\right)}{Estimatedusefullife}\hfill \\ Depreciation=\frac{\left(\$2,202,000-\$392,000\right)}{\text{25 }years}\hfill \\ Depreciation=\frac{\$1,810,000}{\text{25 }years}\hfill \\ Depreciation=\$72,400\hfill \end{array}$

Entry 3- Calculation of Depreciation expense-
Given,

• Estimated useful life = 12 years
• Cost = $390,000 (calculated in Req.1)
• It has no scrap value

  $\begin{array}{l}Depreciation=\frac{\left(Cost–ScrapValue\right)}{Estimatedusefullife}\hfill \\ Depreciation=\frac{\left(\$390,000-\$0\right)}{\text{12 }years}\hfill \\ Depreciation=\frac{\$390,000}{\text{12 }years}\hfill \\ Depreciation=\$32,500\hfill \end{array}$

Entry 4- Calculation of Depreciation expense-
Given,

• Estimated useful life = 20 years
• Cost = $164,000 (calculated in Req.1)
• It has no scrap value

  $\begin{array}{l}Depreciation=\frac{\left(Cost–ScrapValue\right)}{Estimatedusefullife}\hfill \\ Depreciation=\frac{\left(\$164,000-\$0\right)}{\text{20 }years}\hfill \\ Depreciation=\frac{\$164,000}{20years}\hfill \\ Depreciation=\$8,200\hfill \end{array}$

Conclusion

Thus, depreciation expense has been calculated and entries have been passed.