A noncurrent asset that is used in the normal operations of a business to genera

Question

A noncurrent asset that is used in the normal operations of a business to generate revenue is called a fixed asset. The historical cost principle is applied to fixed assets. A fixed asset should be recorded at its cost, which includes any expenditures necessary to prepare it for its intended use. The cost of a fixed asset, except for the cost of land, is allocated as an expense. When multiple assets are purchased as a group and each asset has a different estimated life, the cost of each asset must have a separate ledger account. In the case of a group purchase, the cost must be allocated among the assets acquired on the basis of each asset's proportion of the total fair market value of the assets acquired. Fixed assets are reported in the section of the. Fixed assets with different useful lives but purchased as a group must have (separate ledger accounts i Land has an indefinite life and is classified as Assume that a building and the land it is situated on, along with a dump truck, are purchased at an auction. The three assets were purchased together for a price of $230,000. The fair market value of the assets are shown in the table below. Determine each asset's percentage of fair maricetvalue total. Then, apply that percentage to the group purchase cost to determine the allocated cost to be recorded for each asset.

Explanation / Answer

Description Fair Market Value ($) Percentage of total (Note-1) Allocated cost (Note-2) Land (a) 96600 35% 80500 Building (b) 151800 55% 126500 Truck (.c) 27600 10% 23000 Total (a+b+c) 276000 100% 230000 Note-1 Calculation of Percentage of total = (Fair market value of Assets/Total Fair market value)*100 1. Land = (96600/276000)*100 = 35% 2. Building = (151800/276000)*100 = 55% 3. Truck (151800/276000)*100 10% Note-2 Calculation of Allocated cost In case of of Group purchase of assets, the cost should be allocated among the assets on the basis of each assets proportion of the total fair market value of the assets acquired, Hence, Allocated cost of assets = (Fair market value of assets/ Total fair market value of all assets)* Total Purchase cost of all assets Where, Total purchase cost of all assets= 230,000 1. Allocated cost of Land = (96600/276000)*230000 = 80500 2. Allocated cost of Building = (151800/276000)*230000 = 126500 2. Allocated cost of Truck = (27600/276000)*230000 = 23000

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