Chapter 8, Problem 3PSA

To determine

Depreciation:

Depreciation is the amount of decrease in the value of an asset within a set time period due to wear and tear of that particular asset. It helps in readjusting the actual cost of the particular asset o which the depreciation is applied.

Straight Line Depreciation:

Straight line depreciation is one of the methods of depreciation in which fixed rate of depreciation is provided throughout the course of depreciation on a particular asset.

To prepare: A table and to allocate the cost.

Explanation of Solution

Prepare table to show allocation of cost:

Table (1)

Working Notes:

Computation of total appraised value:

  $\begin{array}{c}\text{Total}\text{appraised}\text{value}=\left(\begin{array}{c}\text{Appraised}\text{value}\text{of}\text{land}\\ +\text{Appraised}\text{value}\text{of}\text{building}\\ +\text{Appraised}\text{value}\text{of}\text{land}\text{improvement}1\end{array}\right)\\ =\$1,736,000+\$644,000+\$420,000\\ =\$2,800,000\end{array}$

Total appraised value is $2,800,000.

Land

Computation of percentage of land of the total appraised value:

  $\begin{array}{c}\text{Percentage}\text{of}\text{land}=\frac{\text{Appraised}\text{value}\text{of}\text{land}}{\text{Total}\text{appraised}\text{value}}\times 100\\ =\frac{\$1,736,000}{\$2,800,000}\times 100\\ =62\%\end{array}$

Percentage of land is 62%.

Apportioned cost

Computation of apportioned cost:

  $\begin{array}{c}\text{Apportioned}\text{cost}=\text{Cash}\text{actually}\text{paid}\times \text{Percentage}\text{of}\text{land}\\ =\$2,600,000\times 62\%\\ =\$1,612,000\end{array}$

Apportioned cost of land is $1,612,000.

Building

Computation of percentage of building of the total appraised value:

  $\begin{array}{c}\text{Percentage}\text{of}\text{building}=\frac{\text{Appraised}\text{value}\text{of}\text{building}}{\text{Total}\text{appraised}\text{value}}\times 100\\ =\frac{\$644,000}{\$2,800,000}\times 100\\ =23\%\end{array}$

Percentage of building is 23%.

Apportioned cost

  $\begin{array}{c}\text{Apportioned}\text{cost}=\text{Cash}\text{actually}\text{paid}\times \text{Percentage}\text{of}\text{building}\\ =\$2,600,000\times 23\%\\ =\$598,000\end{array}$

Apportioned cost of building is $598,000.

Land Improvements 1

Computation of percentage of land improvements 1 of the total appraised value:

  $\begin{array}{c}\text{Percentage}\text{of}\text{land}\text{improvement}1=\frac{\text{Appraised}\text{value}\text{of}\text{land}\text{improvement}1}{\text{Total}\text{appraised}\text{value}}\times 100\\ =\frac{\$420,000}{\$2,800,000}\times 100\\ =15\%\end{array}$

Percentage of land improvement 1 is 15%.

Apportioned cost

Computation of apportioned cost:

  $\begin{array}{c}\text{Apportioned}\text{cost}=\text{Cash}\text{Actually}\text{paid}\times \text{Percentage}\text{of}\text{land}\text{improvement}1\\ =\$2,600,000\times 15\%\\ =\$390,000\end{array}$

Apportioned cost of land improvement 1 is $390,000.

2.

To determine

To Prepare: Journal Entry.

Explanation of Solution

Record the entry for purchase of assets.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Jan1	Land		2,115,800
	Building 2		598,000
	Building 3		2,202,000
	Land improvements 1		390,000
	Land improvements 2		164,000
	Cash			5,469,800
	(To record the purchase of assets)

Table (2)

• Building is an asset account. Building account increases as the new building has been purchased; hence all the assets are debited as they increases in value.
• Land is an asset account. Land account increases as a new land is purchased and all the assets are debited as a new asset is purchased or if its value increases.
• Vehicle account is an asset account. Vehicles account increases as a new vehicle is purchased and all the assets are debited as a new asset is purchased or if its value increases.
• Land improvements are an asset account. Land improvement account increases as some improvements have been done on land to increase its useful life and all the assets are debited as their value increases.
• Cash account is an asset account. Cash account decreases as the amount paid for the purchase of all assets are made in cash and all the assets are credited as their values decreases.

3.

To determine

To Prepare: Adjusting entries.

Explanation of Solution

Building 2

Record depreciation on building 2.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
	Depreciation		26,900
	Accumulated Depreciation			26,900
	(To record the depreciation)

Table (3)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.
• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and is increasing as the depreciation is transferred to this account. This is the reason it is credited.

Working Notes:

Computation of depreciation:

  $\begin{array}{c}\text{Depreciation}=\frac{\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Residual}\text{value}\right)}{\text{Useful}\text{life}}\\ =\frac{\$598,000-\$60,000}{2}\\ =\$26,900\end{array}$

Depreciation that will charge to building is $26,900.

Building 3

Record entry for depreciation on building 3

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
	Depreciation		72,400
	Accumulated Depreciation			72,400
	(To record the depreciation)

Table (4)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.
• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and is increasing as the depreciation is transferred to this account. This is the reason it is credited.

Working Notes:

Computation of depreciation:

  $\begin{array}{c}\text{Depreciation}=\frac{\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Residual}\text{value}\right)}{\text{Useful}\text{life}}\\ =\frac{\$2,202,000-\$392,000}{25}\\ =\$72,400\end{array}$

Depreciation that will charge to building 3 is $72,400.

Land improvement 1

To record entry for depreciation on Land improvement 1,

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
	Depreciation		32,500
	Accumulated Depreciation			32,500
	(To record the depreciation)

Table (5)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.
• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and is increasing as the depreciation is transferred to this account. This is the reason it is credited.

Working Notes:

Computation of depreciation:

  $\begin{array}{c}\text{Depreciation}=\frac{\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Residual}\text{value}\right)}{\text{Useful}\text{life}}\\ =\frac{\$392,000}{12}\\ =\$32,500\end{array}$

Depreciation charged to improvement 1 $32,500.

Land improvement 2

To record entry for depreciation on Land improvement 2,

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
	Depreciation		8,200
	Accumulated Depreciation			8,200
	(To record the depreciation)

Table (6)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.
• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and is increasing as the depreciation is transferred to this account. This is the reason it is credited.

Working Notes:

Computation of depreciation:

  $\begin{array}{c}\text{Depreciation}=\frac{\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Residual}\text{value}\right)}{\text{Useful}\text{life}}\\ =\frac{\$164,000}{20}\\ =\$8,200\end{array}$

Depreciation that will charge to improvement 2 is $8200.