PART I. Problems . ABC closing costs of $5 ompany purchased land for $350,000 wi
ID: 2328096 • Letter: P
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PART I. Problems . ABC closing costs of $5 ompany purchased land for $350,000 with intentions to construct eebding on the site. At the time of the closing, ABC Company paid 000, title fees of $800, and attorney's fees of $3,200. When ompany purchased the land, removal of an old building waS ABC C ABC C fro ompleted in preparation for the new building at a cost of $8,000. However ompany was able to sell a portion of the building materials retrieved m the old, demolished building to a local contractor for $2,000. After $21,000 was paid to grade the property, a building was constructed at a total cost of $600,000. Required: Based on the previous information, identify the total acquisition costs for the land and the building. 2. ABC Company acquired a vehicle on January 1, 20X2, for $78,000. The machine is estimated to have a 6-year life, with a residual value of $9,000. ABC Company is not certain whether to use the straight-line or double- declining-balance method of depreciation. Prepare the following depreciation schedule: Straight-Line Double-Declining-Balance Depreciation Book Depreciation Book Expense Value Expense Value $78,000 Date 01/01/2X02 12/31/2X02 12/31/20X3 12/31/20X4 12/31/20X5 $78,000Explanation / Answer
The cost of land & equipment includes the purchase price of the asset and all expenditures necessary to prepare the asset for its intended use, Land purchases often involve rlegal fees, bank fees, title search fees, and real state commision, attorney fees. Sometimes there are Old buildings, whiich may need to be demolished before the company can use the land, such expenses incurred on Demolition are considered part of the land's cost. the cost of buildings includes the purchase price and all closing costs related with the acquisition of the buildings,
PARTICULARS
AMOUNT
PURCHASE COST OF LAND
$350000
ADD:CLOSING COST
$5000
TITLE FEES
$800
ATTORNEY FEES
$ 3200
DEMOLITION OF OLD BUILDING
$ 8000
Gradation of property
$ 21000
Cost of Building construction
$ 600000
LESS : Sale of retrieved old building material
($ 2000)
TOTAL COST OF LAND & BUILDING
$ 986000
B) Straight line method : Under straight line depreciation method, the Cost of an asset is depreciated uniformly over each period until it reaches its salvage value
Cost of the asset is the purchase price of the asset
Salvage value is the value of the asset at the end of its useful life
Useful life of asset represents the number of years in which the asset is expected to be used . $78
.
Annual Depreciation = Cost of Asset- Salvage value / useful life of Asset
= $78000-9000/6
= $11500
SCHEDULE OF DEPRECIATIOM (STRAIGHT LINE METHOD)
DATE
DEPRECIATION EXPENSE
BOOK VALUE
1-1-2002
78000
31-1-2002
11500
66500
31-12-2003
11500
55000
31-12-2004
11500
43500
31-12-2005
11500
32000
31-12-2006
11500
20500
31-12-2007
11500
9000
Under the double declining balance method, double means twice or 200% of the straight line depreciation rate.
Rate of depreciation under Straight line method= 11500/(78000-9000)*100
=16.66%
Rate of depreciation under Straight line method = 16.66%*2 = 33.3333%
SCHEDULE OF DEPRECIATIOM (Double Declining Method of dEPRECIATION)
DATE
BOOK VALUE AT THE BEGGINING
DEPRECIATION EXPENSE
BOOK VALUE AT TH END
1-1-2002
78000
31-12-2002
78000
78000*33.33%=26000
52000
31-12-2003
52000
52000*33.33%=17332
34668
31-12-2004
34668
34668*33.33%=11555
23113
31-12-2005
23113
23113*33.33%=7704
15409
31-12-2006
15409
15409*33.33%= 5136
10273
31-12-2007
10273
1273 (balance)
9000
PARTICULARS
AMOUNT
PURCHASE COST OF LAND
$350000
ADD:CLOSING COST
$5000
TITLE FEES
$800
ATTORNEY FEES
$ 3200
DEMOLITION OF OLD BUILDING
$ 8000
Gradation of property
$ 21000
Cost of Building construction
$ 600000
LESS : Sale of retrieved old building material
($ 2000)
TOTAL COST OF LAND & BUILDING
$ 986000
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