Chapter 8, Problem 3PSB

1.

To determine

To prepare:

A table and to allocate the cost.

Explanation of Solution

Prepare table to show allocation of cost:

Details	Land ($)	Building 2 ($)	Building 3 ($)	Land Improvement B ($)	Land Improvement C ($)
Purchase Price	868,000	527,000		155,000
Demolition	122,200
Land grading	174,500
New Building			1,458,000
New Improvement					103,500
Total	1,164,500	527,000	1,458,000	155,000	103,500

Table (1)

Working Notes:

Computation of total appraised value:

$\begin{array}{c}\text{Total}\text{appraised}\text{value}=\left(\begin{array}{c}\text{Appraised}\text{value}\text{of}\text{land}\\ +\text{Appraised}\text{Value}\text{of}\text{Building}\\ +\text{Appraised}\text{value}\text{of}\text{Land}\text{improvement}1\end{array}\right)\\ =\$795,200+\$482,400+\$142,000\\ =\$1,420,000.\end{array}$

Total appraised value is $1,420,000.

Land

Computation of percentage of land of the total appraised value:

$\begin{array}{c}\text{Percentage}\text{of}\text{land}=\frac{\text{Appraised}\text{value}\text{of}\text{land}}{\text{Total}\text{appraised}\text{value}}\times 100\\ =\frac{\$795,200}{\$1,420,000}\times 100\\ =52\%\end{array}$

Percentage of land is 52%.

Apportioned cost

Computation of apportioned cost:

$\begin{array}{c}\text{Apportioned}\text{cost}=\text{Cash}\text{actually}\text{paid}\times \text{Percentage}\text{of}\text{land}\\ =\$1,550,000\times 52\%\\ =\$868,000\end{array}$

Apportioned cost of land is $868,000.

Building B

Computation of percentage of building of the total appraised value:

$\begin{array}{c}\text{Percentage}\text{of}\text{building}=\frac{\text{Appraised}\text{value}\text{of}\text{building}}{\text{Total}\text{appraised}\text{value}}\times 100\\ =\frac{\$482,800}{\$1,420,000}\times 100\\ =34\%\end{array}$

Percentage of building is 34%.

Apportioned cost

$\begin{array}{c}\text{Apportioned}\text{cost}=\text{Cash}\text{actually}\text{paid}\times \text{Percentage}\text{of}\text{building}\\ =\$1,550,000\times 23\%\\ =\$527,000\end{array}$

Apportioned cost of building is $527,000.

Land improvements B

Computation of percentage of land improvements 1 of the total appraised value:

$\begin{array}{c}\text{Percentage}\text{of}\text{land}\text{improvement}\text{B}=\left(\begin{array}{l}\frac{\text{Appraised}\text{value}\text{of}\text{land}\text{improvement}\text{B}}{\text{Total}\text{appraised}\text{value}}\\ \times 100\end{array}\right)\\ =\frac{\$142,000}{\$1,420,000}\times 100\\ =10\%\end{array}$

Percentage of land improvement B is 10%.

Apportioned cost

Computation of apportioned cost:

$\begin{array}{c}\text{Apportioned}\text{cost}=\text{Cash}\text{actually}\text{paid}\times \text{Percentage}\text{of}\text{land}\text{improvement}\text{B}\\ =\$1,550,000\times 10\%\\ =\$155,000\end{array}$

Apportioned cost of land improvement B is $155,000.

2.

To determine

To prepare:

Journal Entry.

Explanation of Solution

Record the entry for purchase of assets.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Land		1,164,500
	Building B		527,000
	Building C		1,458,000
	Land improvements B		155,000
	Land improvements C		103,500
	Cash			3,408,000
	(To record the purchase of assets)

Table (2)

• Building is an asset account. Building account increases as the new building has been purchased. Hence, Building account is debited.

• Land is an asset account. Land account increases as a new land is purchased and all the assets are debited as a new asset is purchased or if its value increases.

• Vehicle account is an asset account. Vehicles account increases as a new vehicle is purchased and all the assets are debited as a new asset is purchased or if its value increases.

• Land improvements are an asset account. Land improvement account increases as some improvements have been done on land to increase its useful life and all the assets are debited as their value increases.

• Cash account is an asset account. Cash account decreases as the amount paid for the purchase of all assets are made in cash and all the assets are credited as their values decreases.

3.

To determine

To prepare:

adjusting entries.

Explanation of Solution

Building B

Record depreciation on building B.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31 2015	Depreciation		28,500
	Accumulated Depreciation			28,500
	(To record the depreciation)

Table (3)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.

• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and is increasing as the depreciation is transferred to this account. This is the reason it is credited.

Working Notes:

Computation of depreciation:

$\begin{array}{c}\text{Depreciation}=\frac{\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Residual}\text{value}\right)}{\text{Useful}\text{life}}\\ =\frac{\$527,000-\$99,500}{15}\\ =\$28,500\end{array}$

Depreciation that will charge to building is $26,900.

Building C

Record depreciation on building C.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31 2015	Depreciation		60,000
	Accumulated Depreciation			60,000
	(To record the depreciation)

Table (4)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.

• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and is increasing as the depreciation is transferred to this account. This is the reason it is credited.

Working Notes:

Computation of depreciation:

$\begin{array}{c}\text{Depreciation}=\frac{\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Residual}\text{value}\right)}{\text{Useful}\text{life}}\\ =\frac{\$1,458,000-\$258,000}{20}\\ =\$60,000\end{array}$

Depreciation that will charge to building C is $60,000.

Land improvement B

To record entry for depreciation on Land improvement 1,

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Depreciation		31,000
	Accumulated Depreciation			31,000
	(To record the depreciation)

Table (5)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.

• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and is increasing as the depreciation is transferred to this account. This is the reason it is credited.

Working Notes:

Computation of depreciation:

$\begin{array}{c}\text{Depreciation}=\frac{\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Residual}\text{value}\right)}{\text{Useful}\text{life}}\\ =\frac{\$155,000}{5}\\ =\$31,000\end{array}$

Depreciation charged to improvement B is $31,000.

Land improvement C

To record depreciation on Land improvement 2,

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Depreciation		10,350
	Accumulated Depreciation			10,350
	(To record the depreciation)

Table (6)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.

• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and is increasing as the depreciation is transferred to this account. This is the reason it is credited.

Working Notes:

Computation of depreciation:

$\begin{array}{c}\text{Depreciation}=\frac{\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Residual}\text{value}\right)}{\text{Useful}\text{life}}\\ =\frac{\$103,500}{10}\\ =\$10,350\end{array}$

Depreciation that will charge to improvement C is $10,350.