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 $810,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, $458,150; land, $308,550; land improvements, $56,100; and four vehicles, $112,200. 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 $31,000 salvage value.
3. Compute the depreciation expense for year 2017 on the land improvements assuming a five-year life and double-declining-balance depreciation.

Answer 1

1a) Table allocation

assets	Estimated market value	percent of total market value	*	Allocable cost	Allocated cost
Building	458150	49%		810000	396900
Land	308550	33%		810000	267300
Land improvement	56100	6%		810000	48600
Vehicle	112200	12%		810000	97200
Total	935000	100%			810000

1b) Journal entry

Date	account and explanation	Debit	Credit
	Building	396900
	Land	267300
	Land improvement	48600
	Vehicle	97200
	Cash		810000

2) Depreciation on Building = (396900-31000/15) = 24393

3) Depreciation on land improvement = 48600*40% = 19440