Allocation of Package Purchase Price and Depreciation Methods To expand its busi
ID: 2564605 • Letter: A
Question
Allocation of Package Purchase Price and Depreciation Methods
To expand its business, Small Company paid $754,000 for most of the property, plant, and equipment of a small trucking company that was going out of business. Before agreeing to the price, Small hired a consultant for $6,000 to appraise the assets. The appraised values were as follows:
Small issued two checks totaling $760,000 to acquire the assets and pay the consultant on July 1. Small depreciated the assets using the straight-line method on the building and on the equipment, and the double-declining balance method on the trucks. Estimated useful lives and salvage values were as follows:
Assessed Value $120,000 440,000 144,000 Equipment 96,000 Total $800,000 Land TrucksExplanation / Answer
Total Assessed Value of assets $ 800,000 Less: Price paid for assets $760,000 (including expense) Discount $40,000 Discount percentage on Assessed value (40,000 /800,000 *100) = 5% ReqA. Amount Allocated to various assets Assessed value Less: Dsicount @5% Allocated value Land 120,000 -6000 114,000 Building 440,000 -22000 418,000 Trucks 144,000 -7200 136,800 Equipments 96,000 -4800 91,200 Total price paid 760,000 Req B: Journal Entry for acquisition: July 1. Land Dr. 114,000 Building Dr. 418,000 Truck Dr. 136,800 Equipment Dr. 91,200 Cash Account Cr. 760,000 (To record purchase of assets and its payment) ReqC: SLM Annual Depreciation = Cost - Salvage / estimated life Annual Depreciation on building = 418,000 -42,000 /20 = 18800 Depreciation on Dec 31 = 18800 *6/12 = 9,400 Annual Depreciation on Equipment = 91,200 -10,000 / 7 = 11600 Depreciation on Dec 31 = 11600 *6/12 = $ 5,800 Douoble declining: Annual Depreciation on Truck = 136,800 -15,000 /4 = 30450 Rate of depreciation on SLM= 30450 /136800 *100 = 22.26% Rate of double declining = 22.26 *2 = 44.52% Depreciation on truck on Dec31 = 136800 *44.52% *6/12 = 30450 Journal Entries Depreciation Expense-Building Dr. $9,400 Accumulated Depreciation-Building Cr. $9,400 (Record depreciation onbuilding) Depreciation Expense-Trucks Dr. $30,450 Accumulated Depreciation-Trucks Cr. $30,450 (Record depreciation on Trucks) Depreciation Expense-Equipment Dr. $5,800 Accumulated Depreciation-Equipment Cr. $5,800 (Record depreciation on Equipment)
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