On July 1, STLC purchased a building from EZ Construction by p...

Question

On July 1, STLC purchased a building from EZ Construction by putting $60,000 as a down payment and signing a $320,000 note payable due in fifteen years. The note payable had an interest rate of 6% due semi-annually. Other details related to the purchase include:$4,200 in delinquent real estate taxes payable by STLC; $6,000 in brokerage commissions paid by EZ Construction; $1,100 in attorney fees paid by STLC; $11,000 for a company sign at the entrance to the property; and $2,000 for lighting around the grounds of the building. The building is expected to last forty years. What will be the journal entry to record the purchase of the building on July 1?

Accepted Answer

Alright. How'd you guys do? Were you able to find the initial cost? Let's check it out. On July 1st, STLC purchased the building from EZ Construction by putting $$60,000 as a down payment, and signing a 300 20$$,000 note payable due in 15 years. The note payable had an interest rate of 6% due semi annually. And then we've got some other details here. So we've got 4,200 in delinquent real estate taxes payable by STLC. So STLC is going to have to pay these. 6,000 in brokerage fees paid by Easy Construction. Notice who's paying for those. 1100 in attorney fees paid by STLC and then 11,000 for a company sign at the entrance of the property. What does that sound? What does that sound like? A company sign at the entrance of the property? That's that sounds like a land improvement. Right? An improvement to to the land, to the area. Yeah. That I don't think that has to do with the building itself. So that's not gonna be included in the cost of the building. And $2,000 for lighting around the grounds of the building. Again, that's not the building itself. Right? That sounds like a land improvement. So the lighting around the building, that is a land improvement. That's not going to be included in the cost either. And lastly, it tells us the useful life. The building is expected to last 40 years. So that's going to be important once we start depreciating the building over its useful life. But for the initial cost of the building, we don't really have to worry about that 40 year useful life. So what will be the journal entry to record the purchase of the building on July 1st? So to make that journal entry, we need to find out what was the total cost and all of the necessary expenditures to get this ready for use. So let's see what we got. We've got a building here and let's total up all the things that we spent. So first, we've got this the down payment. So that was a cash down payment of 60,000 and we signed a note payable, right? Note payable of 320,000 told us right there. What about this interest? There's interest of 6% due semi annually on the note. Well, remember with interest, we can only include it in the cost if we had constructed the building ourselves. But we purchased the building from another company. Right? We they they constructed it. We didn't construct it. So we cannot capitalize the interest. That is not gonna be part of the cost of the land. So that's not gonna be in here at all. I'm gonna scratch it out. So our other details, the 42100 in delinquent real estate taxes, we have to pay for that, right? STLC is paying for that and if we didn't pay for that, well, we couldn't use the building. So that is definitely gonna be included in our cost and that is I'll say taxes right here and that's 4,200. 6,000 in brokerage commissions, that sounds like we would include it, except that it was paid by easy construction. Well, if easy construction had to pay it, we didn't have to pay it. That's no necessary expenditure for us, so we're not going to include that. I'm going to scratch that out. That's not included by us. 1100 in attorney fees paid by STLC. We paid for that so that's going to be included. Alright. Attorney here and that was 1100 in attorney fees and that was it. The rest was land improvements there, right? So we've got everything lined up here. Let's go ahead and add up all of our totals. We've got 60,000 plus 320,000 plus 4200 plus 1100 and we get 385,300. All right, that's going to be the total cost of the building, right? This is going to be the asset that we make for the building is going to be the 385,300. So when we make our journal entry, we're going to debit building, right? And this is an account, for an asset, right? This is an asset. So this is a debit increasing the value by the 385,300, right? So that's a debit to buildings. What's going to be our credits? Well, we paid 60,000 in cash, but we paid for other things in cash as well, right? Well, let's look at each of the other things. Well, we know we had the notes payable, so let's put the notes payable in there as a credit. Notes payable, that's going to be a credit for 320,000 and then what else do we have? Notice the taxes. It says the taxes are payable by STLC. It doesn't technically say we paid them. Now, if you put this as cash right now, I think it's okay if you had added that to the cash total. But just for a technicality, I want to show you that this could actually be something like this. We could actually have something like real estate taxes payable or taxes payable, right? Because maybe we didn't pay them yet. Maybe we're gonna pay them later on. The the the government hasn't come after us to pay those taxes yet, so we have a taxes payable. If we had paid it in cash, well, that would increase the amount of cash that we pay. And then the attorney fees, it does say paid by STLC. So since we paid those, we're gonna assume that was cash. So we've already dealt with the note payable, the taxes. So the 60,000 in cash, plus the 1100 that we're assuming was also paid in cash to the attorney, we're going to include that there. So we add those together and that's going to come out to 61,100 and there we go. This is going to balance, right? Our debits equal 385,300 and if we add up all of those credits, let me get out of the way. If we add up all those credits, those also equal 385300. So we are balanced here and notice we're eventually going to have to pay those taxes off, right? So we'll see those taxes, go away once we pay them. So notice, if you had just put the taxes payable as cash, you could probably give yourself a pat on the back. I think you did pretty well on this. So if you got this problem right, I think you're doing pretty good with the cost of these assets, right? Alright. Let's go ahead and move on to the last category, machinery or equipment. Alright? Let's check it out.

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