Question

Colacci Corporation is a Calgary-based manufacturer of gym equipment. In early January 2018, the company acquired land and a building to be used as the company's new head office. Colacci issued a $2M, five-year non-interest bearing note to the seller. Payment is to be made in five equal instalments of $400,000 at the end of each year. As a result of a depressed real estate market, the fair value of the building cannot be readily determined. However, it has been ascertained that, given Colacci 's credit rating and market conditions, an interest rate of 9% would properly reflect the substance and credit risk of the negotiated payment schedule.

Other information:

- One third of the total value of the acquisition is attributable to the land. o The building is expected to have a useful life of 25 years.

- Throughout the year, Colacci incurred maintenance costs of $87,000 and paid them in cash.

- A parking lot was built at a cost of $100,000 cash. The work was completed on July 1 and is expected to have a useful life of 10 years.

Required

1. Prepare all journal entries that are required to record the above events and transactions. Round all values to the nearest dollar.

Answer 1

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Working:
Present Value of Land & Building	400000*3.88965 (PV of 9%,5 years)
	=1555860
PV of Land 1/3	518620
PV of Building 2/3	1037240
Deprecation:
-Land	0
-Building 1037240/25	41490
-Parking Lot (100000/10)*6/12 (6 Months)	5000

Journal Entries:

Accounts	Debit	Credit
Land	518620
Building	1037240
Note Payable		1555860
(Recording acquisition of Land and Building)
Maintenance Exp	87000
Cash		87000
(Recording maintenance Cost)
Parking Lot - Improvement of Land	100000
Cash		100000
(Recording construction of parking lot)
Depreciation Exp (41490+5000)	46490
Accumulated Depreciation-Building		41490
Accumulated Depreciation-Parking Lot		5000
(Recording annual Depreciation)