I. plant asset cost; depreciation methods ii. asset cost allocation

I. Plant Asset Cost; depreciation methods

Timberly Construction negotiates a lump-sum purchase of several assets from a company that is going out of business. The purchase is completed on January 1, 2013, at a total cash price of \$900,000 for a building, land, land improvements and four vehicles.  The estimated market values of the assets are building – \$508,800; land – \$297,600; land improvements – \$28, 800 and four vehicles – \$124,800. The company’s fiscal year ends on December 31.

Required:

1. Prepare a table to allocate the lump-sum purchase price to the separate assets purchased (round per cents to the nearest 1%). Prepare the journal entry to record the purchase.

2. Compute the depreciation expense for year 2013 on the building using the straight-line method, assuming a 15-year life and a \$27,000 salvage value.

3. Compute the depreciation expense for year 2013 on the land improvements assuming a five-year life and double-declining-balance depreciation.

Analysis Component

4. Defend or refute this statement: Accelerated depreciation results in payment of less taxes over the asset’s life.

II. Asset Cost Allocation; straight-line-depreciation

In January 2013, Mitzu Co. pays \$2,600,000 for a tract of land with two buildings on it. It plans to demolish Building 1 and build a new store in its place. Building 2 will be a company office; it is appraised at \$644,000, with a useful life of 20 years and a \$60,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at \$420,000 that are expected to last another 12 years with no salvage value. Without the buildings and improvements, the tract of the land is valued at \$1,736,000. The company also incurs the following additional cost:

Cost to demolish Building 1………………………………………….   \$   328,400

Cost to construct new building (Building 3), having a useful life

of 25 years and a \$392,000 salvage value……………………     2,202,000

Cost of new land improvements (Land Improvements 2) near

Building 2 having a 20-year useful life and no salvage value..       164,000

Required:

1. Prepare a table with the following column headings: Land, Building 2, Building 3, Land Improvements 1 and Land Improvements 2. Allocate the cost incurred by Mitzu to the appropriate columns and total each column (round percents to the nearest 1%).

2. Prepare a single journal entry to record all the incurred costs assuming they are paid in cash on January 1, 2013.

3. Using the straight-line method, prepare the December 31 adjusting entries to record depreciation for the 12 months of 2013when these assets were in use.

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