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.

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.

True

 

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.)

General-Journal	Debit	Credit
Land
Buildings
Cash

 

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.)

 

Depreciation

$

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.)

Book value

$

 

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