1. Sample Problems
Exercise 18.1 and 18.8

2. Exercise 18.1 The following costs were incurred by City Auto Parts in connection with the construction of a retail store building:

3. What is the capitalized cost of the land?
Purchase price of land $400,000
Demolition cost of old bldg ,000
Cost to level building site ,000
$439,000

4. What is the capitalized cost of the new building?
Cost to construct building $1,600,000
Legal costs related to building ,000
$1,612,000

5. Step 1 – determine depreciation on old asset:
Exercise 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 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 company paid $490,000 cash and was given a trade-in allowance of $410,000 for the old equipment.
Step 1 – determine depreciation on old asset:
($800,000 - $80,000)/8 = $90,000 per year
January 2003 to July 2007 = 4.5 years
4.5 x $90,000 = $405,000

6. Journal Entry to record the trade in:
2007
July 3 Equipment (new) 885,000
Accumulated depreciation-
equipment (old) 405,000
Cash ,000
Equipment (old) 800,000
trade in of old equipment for new equipment

7. 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:
2007
July 3 Equipment (new) 900,000
Accumulated depreciation –
equipment (old) 405,000
Loss on exchange ,000
Cash ,000
Equipment (old) 800,000
trade in of old equipment for new equipment