Timberly Construction negotiates a lump-sum purchase of several assets from a co
ID: 2339015 • Letter: T
Question
Timberly Construction negotiates a lump-sum purchase of several assets from a company that is going out of business. The purchase is completed on January 1, 2017, at a total cash price of $820,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, $434,250; land, $328,100; land improvements, $67,550; and four vehicles, $135,100. The company's fiscal year ends on December 31. Required: 1-a. Prepare a table to allocate the lump-sum purchase price to the separate assets purchased. 1-b. Prepare the journal entry to record the purchase. 2. Compute the depreciation expense for year 2017 on the building using the straight-line method, assuming a 15-year life and a $29,000 salvage value. 3. Compute the depreciation expense for year 2017 on the land improvements assuming a five-year life and double-declining-balance depreciationExplanation / Answer
Requirement Part 1-a
Since, no better method of allocation of lump-sum purchase is given, it is to be allocated to individual assets as a percentage of the estimated market value of the assets.
The total estimated market value of all assets = 434,250 + 328,100 + 67,550 + 135,100 = 965,000
Allocation of lump-sum purchase price to the separate assets purchased
Asset
Working
Allocation ($)
Building
820,000 * 434,250 / 965,000
369,000
Land
820,000 * 328,100 / 965,000
278,800
Land Improvements
820,000 * 67,550 / 965,000
57,400
Four Vehicles
820,000 * 135,100 / 965,000
114,800
Total
820,000
Requirement Part 1-b
Journal Entry
Building A/c Dr.
369,000
Land A/c Dr.
278,800
Land Improvements A/c Dr.
57,400
Four Vehicles A/c Dr.
114,800
To Cash / Bank A/c
820,000
Requirement Part 2
Depreciation Expense for year 2017 on Building (Straight-Line Method)
Depreciation = Cost of the Asset – Salvage Value / No. of years = 369,000 – 29,000 / 15 years = $ 22,667
Requirement Part 3
Depreciation Expense for year 2017 on Land Improvements (Double Declining Balance Method)
Straight line Depreciation rate percent = 100% / 5 years = 20%
Double Declining balance Depreciation rate percent = 20% * 2 = 40%
Depreciation for year 2017 = 57,400 * 40% = $ 22,960
Asset
Working
Allocation ($)
Building
820,000 * 434,250 / 965,000
369,000
Land
820,000 * 328,100 / 965,000
278,800
Land Improvements
820,000 * 67,550 / 965,000
57,400
Four Vehicles
820,000 * 135,100 / 965,000
114,800
Total
820,000
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