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 $830,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, $503,250; land, $247,050; land improvements, $64,050; and four vehicles, $100,650. 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 $30,000 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

1-a.

Particulars	Market Values	Allocation Ratio	Allocated Values
Building	$503,250	503,250:915,000	$456,500
Land	$247,050	247050:915000	$224,100
Land Improvements	$64,050	64050:915000	$58,100
Four Vehicles	$100,650	100650:915000	$91,300
Total	$915,000	915000:915000	$830,000

1-b

Cash A/c....................dr 830,000

To Land 224,100

To Building 456,500

To Land Improvements 58,100

To vehicles 91,300

(Being the vehicles purchased at lump sum value)

2. Depreciation = (Cost value - Salvage Value) / useful life in yrs

Building = ($456,500 - $30,000) / 15

= $28,433

3. value of land improvements - $58100

useful life - 5yrs

58100 / 5= 11620

Percentage of depreciation a sper straight line - $11,620 / $58,100 = 20%

As the method is Double Declining Balance Method - 20% * 2 = 40%

So, Depreciation on Land Improvements = $58,100 * 40% = $23,240