Bridge
City Consulting bought a building and the land on which it is located
for $169,400 cash. The land is estimated to represent 60 percent of the
purchase price. The company paid $28,000 for building renovations before
it was ready for use.
| Requirement 1: |
| The renovation costs should be capitalized. |
| Requirement 2: |
| Give
the journal entry to record all expenditures. Assume that all
transactions were for cash and they occurred at the start of the year. (Omit the "$" sign in your response.) |
| Requirement 3: |
| Compute
straight-line depreciation on the building at the end of one year,
assuming an estimated 13-year useful life and a $14,400 estimated
residual value.(Round your answer to the nearest whole number. Omit the "$" sign in your response.) |
| Requirement 4: |
| What should be the book value of the land and building at the end of year 2? (Round your answer to the nearest whole number. Omit the "$" sign in your response.) |
Explanation:
1:
|
The renovation costs should be capitalized because they are necessary costs of preparing the building for use.
|
2:
|
Land = $169,400 x 60% = $101,640
|
|
Building = ($169,400 x 40%) + $28,000 = $95,760
|
3:
|
The depreciation expense on the building for the first year is $6,258 based on the following calculation:
|
| | | |
| Cost of building: | | |
| Initial Payment | $ | 67,760 |
| Renovation prior to use | | 28,000 |
| |
|
|
| Acquisition cost: | $ | 95,760 |
| |
|
|
|
|
Straight-line Depreciation: ($95,760 cost - $14,400 residual value) x1/13 years = $6,258
|
| |
|
Land is presumed to have an unlimited life, so it is not depreciated.
|
4:
|
Computation of the book value of the property at the end of year 2:
|
| | | | | | |
| Building | $ | 95,760 | | | |
| Less: Accumulated depreciation ($6,258 x 2 years) | | (12,516 | ) | | $ 83,244 |
| |
|
|
| | |
| Land | | | | | 101,640 |
| | | | |
|
|
| Book Value: | | | | | $ 184,884 |
| | | | |
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