In January 2015, Mitzu Co. pays $2,800,000 for a tract of land with two buildings on it. It plans to demolish Building 1 and build a new store in its place. Building 2 will be a company office; it is appraised at $750,000, with a useful life of 20 years and a $80,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $360,000 that are expected to last another 12 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $1,890,000. The company also incurs the following additional costs:

Cost to demolish Building 1	$	341,400
Cost of additional land grading		187,400
Cost to construct new building (Building 3), having a useful life of 25 years and a $398,000 salvage value		2,242,000
Cost of new land improvements (Land Improvements 2) near Building 2 having a 20-year useful life and no salvage value		168,000

Problem 8-3A Allocation of Purchase Land lmprovements Appraised Percent of Apportioned value Total Cost 1 Land Land lmprovements lmProvements lmprovement Calculation of Annual Depreciation Expense by asset Land Buildine 598,000 Cost basis Less Salvage value Depreciable Basis Divided by estimated useful life Annual dePreciation expense Buildine 2 Land is not depreciable 3 Land lmP 2,202,000 1 390,000 Land lmP 2 164,000 0 60,000 392,000 538,000 L,81o,ooo 390,000 164,000 20 25 12 20 261900 72,400 32,500 . 8,200 Problem 8-3A (45 minutes) Part 1 Land Building Building 2 3 Land Land lmprove- lmprovements ments I 2 Purchase price* $1,612,000 $598,000 $390,000 Demolition 328,400 Land g radin9.............. 175,400 New buildin9.............. $2,202,000 New improvements.... Totals $2flA800 $598-000 $2202.000 $390J00 *Allocation of purchase price Land........ Building 2............... Land lmprovements 1 .......... Totals $164,000 $1@1000 Appraised Value Percent of Total Apportioned $1,736,000 644,000 420.000 $2.800.000 62% 23 15 $1,612,000 599,000 390,000 100% $2S00.000 Costn* **Multiply the percentages in column 3 by the $2,600,000 purchase price. Part 2 2015 Jan. 1 Land Building 2............ Building 3............ Land lmprovements 1 ............ Land lmprovements 2............ 2,1 15,800 598,000 .... 2,202,009 Cash To 390,000 164,000 5,469,800 record cosfs of plant assefs. Part 3 2015 Dec.31 Depreciation Expense-Building 2............. 26,900 Accum u lated Depreciation-Buildi n g 2 .........., To 31 26,900 record depreciation [($598,000 - $60,000)/20]. Depreciation Expense-Building 3............. 72,400 Accum ulated Depreciation-Bu ild i ng 3 .........., 72,400 To record depreciation [($2,202,000 - $392,000)/25]. 31 Depreciation Expense-Land lmprov. 1................, 32,500 Accum. Depreciation-Land lmprov. 1 ..........., 32,500 To record depreciati on [$390,000/1 2]. 31 Depreciation Expense-Land lmprov. 2 Accum. Depreciation-Land lmprov. 2 8,200 8,200 To record depreciati on [$1 64,000/20]. 02016 by McGralv-Hill Education. This is proprietary malerial solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied,'scann-ed, duplicated, loruvarded, distributed, or posted on a website, in whole or part. Solutions Manual, Chapter I 479