MGM Grand Inc. purchased two Las Vegas casinos and the adjoining land for a tota

Question

MGM Grand Inc. purchased two Las Vegas casinos and the adjoining land for a total of $167 million. Soon afterwards, the compnay agreed to sell one of the casinos and 58.7 acres of adjacent land for $110 million. A. What issues need to be addressed in order to determine the gain or loss resulting from the sale of one of the casinos? How should the cost of the sold casino be established? B. Assume each casino had a cost of $75 million and the adjacent land originally cost $17 million. Provide the journal entry prepared by MGM Grand to record the sale C. Explain how the casino and the land would each be valued on the balance sheet of the purchasing company. D. Assume that an appraiser assesses the value of the land without the hotel to be $43 million. Compute the annual depreciation charge recognized by the purchasing company if it depriciates buildings using the straight-line rate over a period of 25 years. Assume no salvage value.

Explanation / Answer

Two Casinos and adjoing land purchased $167 Millions One casino sold and 58.7 acres of land sold $110 Millions Issues to be addresed to determine the gain or loss resulting form the sale of one of the casino 1). Detremine the useful life of casino 2). Determine the salvage value to received at the end of useful life 3). Determine method of depreciation to be used to charge depreciation each year 4). Detremin the year of sale and depreciation charged till dates as on date of sale 5). By deducting total depreciation charged for the orignal value - we get net book value 6). Deduct net book value from the sale price to determine - gain or loss on sale B Cost of each casino $75.00 Million Adjacent land $17.00 Million Total cost $92.00 Sale price $110 Gain ( sale - cost price ) $18.00 Note : - It is assumedcost given is net of depreciation Cash / Bank A/c ………………………….Dr. $110 To land $17.00 To casino $75.00 To PLA /c - gain on sales of fixed assets $18.00 ( Being land and casino sold at a gain of$ 18 million ) C. land and casino to valued on the balance sheet of the purchasing company at the price it was purchased ie - 110 million dollars , it would include the gain to the seller company D Value of land without hotel 43 Total value of casino and land 110 hence value of casino 67 ( 167 - 43 ) use full life 25 years salvage 0 Depreciation under straight line = ( value of building - salvage / useful life ) ( 67 - 0) / 25 2.68

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