Cala Manufacturing purchases land for $399,000 as part of its plans to build a new plant. The company pays $27,000 to tear down an old building on the lot and $39,913 to fill and level the lot. It also pays construction costs $1,664,500 for the new building and $105,068 for lighting and paving a parking area. Prepare a single journal entry to record these costs incurred by Cala, all of which are paid in cash

A.

Dr. Land Account with $399,000

Cr. Cash Account with $399,000

(Being Recognition of Land Purchased with Cash)

B.

Dr. Land Account with $27,000

Dr. Land Account with $39,913

Cr. Cash Account with $66,913

(Being cash paid in preparing the Land for construction work)

C.

Dr. Building Account with $1,664,500

Dr. Building Account with $105,068

Cr. Cash with 1,769,568

(Being Cost of constructing a Building and a car park, and lighting paid with Cash)

Explanation:

Journal entries are practical Accounts that should reflect the transactions of an entity or individual.

In Accounting, transactions are recognized as Debits or Credits. For each Debit entry, we must also have a corresponding Credit Entry; and vice versa. This process is what allows for Account Balancing and ease of reconciliation.

The Journal entry are among the first entry levels in capturing Business Data.

A. Land is an Asset, and Cash with which it was Purchased is also an Asset.

This therefore means we have obtained an Asset in exchange for giving off an existing Asset.

The entry would be:

      (Being Land Purchased with Cash)

By Debiting Asset, Cala has improved (increased) the value of its Assets and by Crediting Cash, Cala has depleted (Reduced) the Cash available to it.

B. The Company incurs some costs in putting the Land to use for its new plant.

First it tears down the old Building. And secondly it fills and levels the lot.

These are improvement costs to the Land it acquired. And in reality they potentially have enhanced the value of the Asset (the Land in this case)

If Cala were to list the same land for resale after these 2 activities he would likely be selling at the minimum the costs he purchased it and the cost of making it leveled having brought down the old building.

Thus our Journal entry will look as such:

        (Being cost of preparing the Land for construction work)

Once again, Asset is enhanced/Increased while our Cash reserves is depleted/reduced

C. The company then goes full scale in setting up a Building Construction on the Land and in addition accentuates the site with lighting and a parking area. We would account for this differently from the earlier activities:

        (Being Cost of constructing a Building and a car park, and lighting)

While this is also an Asset, it is different from the Land. This helps a project Manager and the Business identify the cost of its Building separately from the Cost of Land. Remember Buildings depreciate but Land do not go through the same type of depreciation as Buildings go through. Hence it is important to separate both.

Dr: the cost of purchasing the land$399,000, Dr: Cost to tear down an old building $27,000,Dr: The cost to fill and level the lot$39,913, Dr: Cost of lighting and paving a parking area $105,068, Dr: the cost of construction for the new building $1,664,500, Cr Cash $399,000, Cr : Cash $27,000,Cr: Cash $39,913, Cr :Cash $105,068, Cr :Cash $1,664,500

Explanation:

The journal entry to record the cost incurred by Carla will be

Dr: The cost of purchasing the land $399,000, Dr : Cost to tear down an old building $27,000, Dr: The cost to fill and level the lot $39,913

Dr: The cost of lighting and paving a parking area $105,068

Dr: The cost of construction for the new building $1,664,500

Cr: Cash $399,000, Cash $27,000, Cash $39,913, Cash $105,068, Cash $1,664,500

The cost of purchasing the land is the original cost recognized in Accounting for the land. While all other cost incurred such as the cost to tear down an old building is the cost incurred in the process of preparing the land for construction work to begin on the new plant to be built. The cost of lighting and paving a parking area is a cost incurred to improve the land. The cost of building the plant is the cost of erecting a new structure on the land, the new building will be an asset to Cala manufacturing

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