Sample ProblemsSample Problems

Exercise 18.1 and 18.8Exercise 18.1 and 18.8

Exercise 18.1Exercise 18.1The following costs were incurred by City Auto Parts in The following costs were incurred by City Auto Parts in

connection with the construction of a retail store building:connection with the construction of a retail store building:

What is the capitalized cost of the land?What is the capitalized cost of the land?

Purchase price of landPurchase price of land $400,000$400,000

Demolition cost of old bldgDemolition cost of old bldg 25,000 25,000

Cost to level building siteCost to level building site 14,00014,000

$439,000$439,000

What is the capitalized cost of the new building?What is the capitalized cost of the new building?

Cost to construct buildingCost to construct building $1,600,000$1,600,000

Legal costs related to buildingLegal costs related to building 12,00012,000

$1,612,000$1,612,000

Exercise 18.8Exercise 18.8

On January 5, 2003, Mountbatten Company purchased construction equipment for On January 5, 2003, Mountbatten Company purchased construction equipment for $800,000, with a useful life of eight years and estimated salvage value of $80,000. The $800,000, with a useful life of eight years and estimated salvage value of $80,000. The company uses the straight-line method of depreciation. On July 3, 2007, this equipment company uses the straight-line method of depreciation. On July 3, 2007, this equipment was traded for new similar construction equipment that has a value of $900,000. The was traded for new similar construction equipment that has a value of $900,000. The

company paid $490,000 cash and was given a trade-in allowance of $410,000 for the old company paid $490,000 cash and was given a trade-in allowance of $410,000 for the old equipment.equipment.

Step 1 – determine depreciation on old asset:Step 1 – determine depreciation on old asset:

($800,000 - $80,000)/8 = $90,000 per year($800,000 - $80,000)/8 = $90,000 per year

January 2003 to July 2007 = 4.5 yearsJanuary 2003 to July 2007 = 4.5 years

4.5 x $90,000 = $405,0004.5 x $90,000 = $405,000

Journal Entry to record the trade in:Journal Entry to record the trade in:

20072007

July 3July 3 Equipment (new)Equipment (new) 885,000885,000

Accumulated depreciation-Accumulated depreciation-

equipment (old)equipment (old) 405,000405,000

CashCash 490,000490,000

Equipment (old)Equipment (old) 800,000800,000

trade in of old equipment for new equipmenttrade in of old equipment for new equipment

Journal entry if Mountbatten paid cash of $525,000 on the trade in Journal entry if Mountbatten paid cash of $525,000 on the trade in and was given an allowance of $375,000 for the old equipment:and was given an allowance of $375,000 for the old equipment:

20072007

July 3July 3 Equipment (new)Equipment (new) 900,000900,000

Accumulated depreciation – Accumulated depreciation –

equipment (old)equipment (old) 405,000405,000

Loss on exchangeLoss on exchange 20,00020,000

CashCash 525,000525,000

Equipment (old)Equipment (old) 800,000800,000

trade in of old equipment for new equipmenttrade in of old equipment for new equipment