Question

Requirement 1: Determine the acquisition cost for each asset acquired in 2018 by Brick co..

Brick paid $500,000 and issued a 3-year, $2,000,000 noninterest-bearing note to acquire Land. Brick normally borrows at 10%. In addition, Brick paid commissions and closing costs of $25,000; fees to clear and grade the land of $20,000; and $30,000 for a parking lot.

Later in the year, PWC paid $600,000 in a transaction to purchase Transportation Equipment and Machinery with fair values of $500,000 and $300,000, respectively.

Answer 1

Calculate the acquisition cost of each asset as follows:

Cost of land = Cash paid + Present value of noninterest note + Commissions and closing costs + fees to clear and grade the land

                    = $500,000 + [$2,000,000 x PV(10%, 3)] + $25,000 + $20,000

                    = $500,000 + ($2,000,000 x 0.751) + $25,000 + $20,000

                     = $2,047,000

Land improvements/Parking lot = $30,000

Transportation equipment = $600,000 x 500,000/(500,000 + 300,000) = $375,000

Machinery = $600,000 x 300,000/(500,000 + 300,000) = $225,000