Question

Bridge City Consulting bought a building and the land on which it is located for $185,000 cash. The land is estimated to represent 60 percent of the purchase price. The company paid $15,000 for building renovations before it was ready for use.
Required:
1. Prepare the journal entry to record all expenditures. Assume that all transactions were for cash and they occurred at the start of the year.
2. Compute straight-line depreciation on the building at the end of one year, assuming an estimated 10-year useful life and a $9,000 estimated residual value.
3. What should be the book value of the land and building at the end of year 2?

Answer 1

Answer:

Bridge City Consulting

1. Journal Entries:

January 1:

Debit Land (60%) $111,000

Debit Building (40%) $74,000

Credit Cash $185,000

To record the purchase of land and building for cash.

Debit Building $15,000

Credit Cash $15,000

To record the cost of renovating the building for use.

2. Depreciation on the building at the end of one year = $8,000.

3. Book value of Land = $111,000

Book value of Building = $89,000

Explanation:

a) Data and Calculations:

Building and land = $185,000

Land (60%) $111,000 Building (40%) $74,000 Cash $185,000

Building $15,000 Cash $15,000

Straight-line Depreciation on Building:

Cost of Building $89,000

Estimated useful life = 10 years

Estimated residual value = $9,000

Depreciable amount = $80,000 ($89,000 - $9,000)

Annual Depreciation Expense = $8,000 ($80,000/10)

b) The book value is different from the net book value.  The net book value of the building at the end of year 2 would be $73,000 (Book value, $89,000 less Accumulated Depreciation, $16,000).  It includes the residual value and the undepreciated portion of the asset.