Question 2 West Machinery Ltd. acquired a new site for its manufacturing operati

Question

Question 2 West Machinery Ltd. acquired a new site for its manufacturing operations. The company was able to find the ideal location in terms of lot size and highway access. West paid $3.2 million to acquire the site. The bank, which was providing West with the financing for the purchase, required that an appraisal be completed of the property. The appraisal report came back with the following estimated market values: land $1,800,000, building $1,080,000, and land improvements $120,000. West explained, to the bank's satisfaction, that it paid the $200,000 premium because of the savings it would realize from minimizing transportation distances given the site's superior highway access. Explain the allocation for West Machinery, and prepare the journal entries. Explain why this allocation process is necessary. Why is the $200,000 is not treated as Goodwill?

Explanation / Answer

The allocation for West Machinery is as under:

Land

Building

Land Improvements

Journal Entries :

Debit Credit

Land $1,800,000

Building $ 1,080,000

Land Improvement $ 120,000

Premium on acquisition $ 200, 000

Cash at Bank $3,200,000

(entries on acquisition of new site)

Profit and Loss $ 200,000

Premium on acquisition $ 200,000

(Premium paid on acquisition charged to profit and loss account)

The allocation is necessary so that the individual assets so acquired find a place in books of accounts at their individual acquisition values.

Revenue $200,000 is not goodwill because goodwill arises when a company /firm acquires another company or a firm. In this case only a site is acquired and not a business or an entity has been acquired or taken over.  

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