Question

Computing and Recording Cost and Depreciation of Assets (Straight-Line Depreciation) Shahia Company bought a building for $382,000 cash and the land on which it was located for $107,000 cash. The company paid transfer costs of $9,000 ($3,000 for the building and $6,000 for the land). Renovation costs on the building before it could be used were $21,000.
Required:
1. Give the journal entry to record the purchase of the property, including all relevant expenditures. Assume that all transactions were for cash and that all purchases occurred at the start of the year.
2. Compute straight-line depreciation at the end of one year, assuming an estimated 10-year useful life and a $15,000 estimated residual value.
3. What would be the net book value of the property (land and building) at the end of Year 2?

Answer 1

Answer:

Explanation:

1.Journal entry

Dr: building $406,000 Dr: land $ 113,000

Total cost of the property

Building =382,000+3,000+21,000=406,000

Land

= 107,000+6000=113,000

2. To compute the straight line depreciation

Cost - Salvage value / Useful life

For land : Cost = $ 382,000 , Salvage value = $15,000, Useful life = 10 years

382,000 - 15,000/10

= 367,000/10

= 36,700

Therefore yearly depreciation = $36,700

Land on the other hand cannot be depreciated because, It is an asset that can last for a very long time, instead it appreciate in value.

3. Net Book value for building

First year cost - Depreciation

382,000 - 36,700 = 345,000

Second year cost - Depreciation

345,000 - 36,700 = 308,000

Therefore the Net Book value of the building after two years = $308,000, while the land would have appreciated in value.

Answer 2

Answer:

1. Debit Fixed Asset (Property)  $519,000

  Credit Cash $519,000

This can be further split into

Dr Building $406,000

Dr Land $113,000

Cr Cash $519,000

2. $50,400

3. $393,200

Explanation:

1. The total cost incurred in the acquisition of the property (Land and building) is $519,000 as shown below

Cost =$382,000 + 107,000 + 9,000 + 21,000$

        = 519,000

This can be split further into the cost for land and cost for building

Cost of Land =$107,000+6,000$

                         $113000$

Cost of Building= $382000+3000+21000$

                            =$406000$

2. $Depreciation = frac{cost-residual value}{Number of years}$$Depreciation = \frac{519000-15}{10} \\=\frac{504000}{10} \\=50400$

3. Netbook value (NBV) at the end of year 2

$NBV ={cost - residual value}-(Depreciation*number of years)\\ =519000-15000-(50400*2)\\ =519000-15000-100800\\ = 393200$