You are a new staff auditor assigned to audit Cray Company's Buildings account. You determine that Cray Company made the following entries in its Buildings account in 1998:

Using all of this information, do the following:

a. Prepare a schedule that shows the separate cost of land, buildings, and land improvements.

b. Compute the amount of depreciation expense for 1998 .

c. Complete the journal entries required to correct the accounts at December 31, 1998. Assume that closing entries have not been made.

d. Write a brief statement describing to management why depreciation must be recorded and how recording depreciation affects net income.

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Debits 1998 Jan. 2 Cost of land and old buildings purchased. $ 720,000 2 Legal fees incident to purchase. 9.600 2 Fee for title search.. 1,200 12 Cost of demolishing old buildings on land 19,200 June 16 Cost of insurance during construction of new building. 4,800 July 30 Payment to contractor on completion of new building. 1,080,000 Aug. 5 Architect's fees for design of new building. 48,000 Sept. 15 Oct. 6 Nov. 1 City assessment for sewers and sidewalks (considered permanent) Cost of landscaping (considered permanent). Cost of driveways and parking lots.. 16,800 9,600 + 60,000 Credit Jan. 15 Proceeds received upon sale of salvaged materials from old buildings... 4,800 In addition to the entries in the account, you obtained the following information in your interview with the accountant in charge of the Buildings account: 1. The company began using the new building on September 1, 1998. The building is estimated to have a 40-year useful life and no salvage value. 2. The company began using the driveways and parking lots on November 1, 1998. The driveways and parking lots have an estimated 10-year useful life and no salvage value. 3. The company uses the straight-line depreciation method to depreciate all of its plant assets.