Question

The following expenditures are related to land, land improvements, and buildings, which were acquired on November 1, 2013.Cost of real estate acquired for a new manufacturing plant 365000The land is appraised for 262,800 and the building for 102,200Real estate taxes paid by the purchaser 20,000Cost of removing barn 8,500Architect fees for updating building 6750Attorneys fees for closing sale 12500Grading land 3500paving parking lot 7000planting trees and shrubs 9250cost of repairs to building due to storm 1300lights placed on driveway 4750fee to real estate broker 25001: Determine the cost of the land, the building and the improvements (Round to the nearest dollar)2: Prepare journal entries on December 31, 2013 for depreciation assuming the building will have a useful life of 20 years and no residual value. Use double declining balance method and the half-year convention. 3: Depreciate the land improvements using straight-line method, a 5 year life, to the nearest month with zero residual value (to the nearest dollar).

Answer 1

1) there is no fixed formula for allocating land costs, specially since you should try to allocate more costs to the building or other depreciable assets than to land, but the IRS is not allowing this anymore. In some places, it is not accepting the old 80/20 rule or even a 60/40 rule for allocating costs, instead it is requiring costs to be allocated based on a professional appraisal.

cost of land:

• appraisal value = $262,800
• real estate taxes = ($262,800 / $365,000) x $20,000 = $14,400
• fee to real estate broker = ($262,800 / $365,000) x $2,500 = $1,800
• cost of removing barn = $8,500
• attorney's fees for closing sale = ($262,800 / $365,000) x $12,500 = $9,000
• grading land = $3,500
• total cost of land = $300,000

cost of building:

• appraisal value = $102,200
• real estate taxes = ($102,200 / $365,000) x $20,000 = $5,600
• fee to real estate broker = $700
• architect's fees for updating building = $6,750
• attorney's fees for closing sale = $3,500
• cost of repairs to building due to storm = $1,300
• total cost of building = $120,050

cost of land improvements:

• paving parking lot = $7,000
• planting trees and shrubs = $9,250
• lights placed on driveway = $4,750
• total cost of land improvements = $21,000

2) if we assume MACRS 20 year property (double declining), half year convention for depreciating the building, the depreciation for 2013 would be 3.75% x $120,050 = $4,501.86 ≈ $4,502

December 31, 2013, depreciation expense

Dr Depreciation expense 4,502

Cr Accumulated depreciation: building 4,502

3) land improvements depreciation expense for year using straight line method = $21,000 / 5 = $4,200 x 2/12 = $700

December 31, 2013, depreciation expense

Dr Depreciation expense 700

Cr Accumulated depreciation: land improvements 700