Question

On January 1, Mitzu Co. pays a lump-sum amount of $2,750,000 for land, Building 1, Building 2, and Land Improvements 1. Building 1 has no value and will be demolished. Building 2 will be an office and is appraised at $671,000, with a useful life of 20 years and a $75,000 salvage value. Land Improvements 1 is valued at $579,500 and is expected to last another 19 years with no salvage value. The land is valued at $1,799,500. The company also incurs the following additional costs.
Cost to demolish Building 1 $345,000
Cost of additional land grading 195,000
Cost to construct new building (Building 3), having a useful life of 25 years and a $402,000 salvage value 2,242,000
Cost of new land improvement (Land Improvements 2) near Building 2 having a 20-year useful life and no salvage value 173,000
Allocate the costs incurred by Mitzu to the appropriate columns and total each column.
Allocation of Purchase Price Appraised Value Percent of Total x Total Cost of Acquisition = Apportioned Cost
Land $1,952,000 x $2,750,000 =
Building 2 $732,000 x $2,750,000 =
Land Improvements 1 $366,000 12% x $2,750,000 = 330,000
Totals $1,952,000 12% x = 330,000

Answer 1

Question Completion:

2. Prepare a single journal entry to record all the incurred costs assuming they are paid in cash on January 1.

Answer:

Mitzu Co.

1. Allocation of   Appraised Value  Percent  x Total Cost      = Apportioned

Purchase Price                             of Total   of Acquisition           Cost

Land                     $1,799,500     59%      x  $2,750,000  =  $1,622,500

Building 2               $671,000     22%       x  $2,750,000  =       605,000

Land Improve-

ments 1                $579,500      19%       x  $2,750,000  =       522,500

Totals                $3,050,000    100%                                 =  $2750,000

2. Journal Entry:

January 1:

Debit Land (demolishing Building 1) $345,000

Debit Land (additional land grading) $195,000

Debit Building 3 $2,242,000

Debit Land Improvements 2 $173,000

Credit Cash $2,955,000

To record the payment of additional costs incurred.

Explanation:

a) Data and Calculations:

Lump-sum amount paid $2,750,000

Additional costs incurred:

Land (demolishing Building 1) $345,000

Land (additional land grading) $195,000

Building 3 $2,242,000, having a useful life of 25 years and a $402,000 salvage value

Land Improvements 2 $173,000 near Building 2 having a 20-year useful life and no salvage value