Question

Carter Company acquired three machines for $200,000 in a package deal. The three assets together had a book value of $160,000 on the seller's books. An appraisal costing the purchaser $2,000 indicated that the three machines had the following market values (book values are given in parentheses):

Machine 1: $60,000   ($40,000)

Machine 2: $80,000   ($50,000)

Machine 3: $100,000 ($70,000)

The three assets should be individually recorded at a cost of (rounded to the nearest dollar)

1. Machine 1           Machine 2            Machine 3

               $40,000              $53,333               $66,667     

2. Machine 1         Machine 2          Machine 3

               $50,000            $62,500             $87,500

3. Machine 1         Machine 2         Machine 3

            $40,000            $50,000            $70,000

4. Machine 1         Machine 2        Machine 3

             $50,500            $67,333           $84,167

Answer 1

Machine 1 = $50500 Machine 2 = $67333 Machine 3 = 84167

Solution :

Total cost of machine = purchase price + appraisal cost

= $200000 + $2000

= $202000

The ratio of allocation = $60000 : $80000 : $100000

= 3 : 4 : 5

= 3/12, 4/12 and 5/12

Allocation :

Machine 1 cost = $202000 × 3/12 = $50500

Machine 2 cost = $202000 × 4/12 = $67333

Machine 3 cost = $202000 × 5/12 = $84167

Note 1: Book value of seller is irrelevant to buyer to record the asset he purchased, because as per historical cost principle assets needs to be recognized at its cost value .

Note 2: For allocation ratio the market values are considered because it is more fair enough to consider the market value rather than book values. If purchaser had purchased from market then the cost of those three assets would have been in the same ratio