Question

Bully Co. paid $150,000 for a purchase that included land, building, and equipment.

An appraiser provided the following estimates of the individual market values of the assets (i.e. if they had been purchased separately): Land, $16,800, Building, $161,700, and Equipment, $31,500.

In addition to paying the $150,000 of purchase price for all the assets, Bully spent $9,000 related to the equipment ($3,000 in fines assessed while transporting the equipment*, $4,000 in labor cost to assemble and install the equipment and $2,000 in labor and materials to test the equipment after assembly). .

*Bully was fined because the equipment exceeded the highway weight limit

Bully uses the straight-line depreciation method and when doing so utilizes the following estimated useful lives and residual values.

Building: 30 year life, 15% residual value

Equipment: 8 year life, 10% residual value

What depreciable base will Bully use for the equipment when calculating depreciation?

Answer 1

Total market value of all assets = 16,800 + 161,700 + 31,500 = $210,000

Equipment's percent of market value

= [Equipment market value / Total market value of all assets] * 100

= [31,500 / 210,000] * 100

= 15%

Equipment's price share in total price paid for all assets

= Total price paid for all assets * Equipment's percent of market value

= 150,000 * 15%

= $22,500

Cost of installation of $4,000 and testing costs of $2,000 form part of the acquisition cost of the equipment but fines paid of $3,000 while transporting the equipment does not form part of the acquisition cost of the equipment.

Deductible base for the equipment when calculating depreciation

= 22,500 + 4,000 + 2,000

= $28,500