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Chapter 9: Q3RQ (page 525)
How do land improvements differ from land?
Yes, Land and Land improvements differ from each other.
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Determining asset cost and recording partial-year depreciation, straight-line Discount Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:
a. Purchase price of three acres of land $ 80,000
b. Delinquent real estate taxes on the land to be paid by Discount Parking 6,300
c. Additional dirt and earthmoving 9,000
d. Title insurance on the land acquisition 3,200
e. Fence around the boundary of the property 9,600
f. Building permits for the building 1,000
g. Architect’s fee for the design of the building 20,700
h. Signs near the front of the property 9,300
i. Materials used to construct the building 215,000
j. Labor to construct the building 175,000
k. Interest cost on the construction loan for the building 9,400
l. Parking lots on the property 28,500
m. Lights for the parking lots 11,200
n. Salary of construction supervisor (80% to building; 20% to parking lot and concrete walks) 50,000
o. Furniture 11,200
p. Transportation of furniture from seller to the building 2,200
q. Additional fencing 6,600
Discount Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value’s
Requirements
1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.
2. All construction was complete and the assets were placed in service on October 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar
Donahue Oil Incorporated has an account titled Oil and Gas Properties. Donahue paid \(6,400,000 for oil reserves holding an estimated 400,000 barrels of oil. Assume the company paid \)510,000 for additional geological tests of the property and $470,000 to prepare for drilling. During the first year, Donahue removed and sold 75,000 barrels of oil. Record all of Donahue’s transactions, including depletion for the first year.
Journalizing partial-year depreciation and asset disposals and exchanges.
During 2018, Mora Corporation completed the following transactions:
Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of \)127,000 and accumulated depreciation of \(72,000) for new equipment. Mora also paid \)70,000 in cash. Fair value of new equipment is \(133,000. Assume the exchange had commercial substance.
Apr. 1 Sold equipment that cost \)18,000 (accumulated depreciation of \(8,000 through December 31 of the preceding year). Mora received \)6,100 cash from the sale of the equipment. Depreciation is computed on a straightline basis. The equipment has a five-year useful life and a residual value of \(0. Dec. 31 Recorded depreciation as follows:
Office equipment is depreciated using the double-declining-balance method over four years with a \)9,000 residual value.
Record the transactions in the journal of Mora Corporation.
Arca Salvage, Inc. purchased equipment for \(10,000. Arca recorded total depreciation of \)8,000 on the equipment. Assume that Arca exchanged the old equipment for new equipment, paying \(4,000 cash. The fair market value of the new equipment is \)5,000. Journalize Arca’s exchange of equipment. Assume this exchange has commercial substance.
Whitney Plumb Associates surveys American eating habits. The company’s accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each asset. During 2018, Whitney Plumb completed the following transactions:
Jan. 1 Purchased office equipment, \(117,000. Paid \)77,000 cash and financed the remainder with a note payable.
Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(350,000 paid in cash. An independent appraisal valued the land at \)275,625 and the communication equipment at \(91,875.
Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Whitney Plumb received \)390,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.
Dec. 31 Recorded depreciation as follows:
Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value. Office equipment is depreciated using the double-declining-balance method over five years with a \)2,000 residual value.
Record the transactions in the journal of Whitney Plumb Associates.
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