Question

Problem 10-1A Plant asset costs; depreciation methods LO C1, P1

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 $840,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, $455,900; land, $320,100; land improvements, $38,800; and four vehicles, $155,200. 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 $29,000 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

Solution 1a:

Allocation of Purchase cost
Asset	Fair value	Allocated purchase cost
Building	$455,900.00	$394,800.00
Land	$320,100.00	$277,200.00
Land Improvements	$38,800.00	$33,600.00
Vehicle	$155,200.00	$134,400.00
Total	$970,000.00	$840,000.00

Solution 1b:

Journal Entries - Timberly Construction
Date	Particulars	Debit	Credit
1-Jan-17	Building Dr	$394,800.00
	Land Dr	$277,200.00
	Land improvements Dr	$33,600.00
	Vehicle Dr	$134,400.00
	To Cash		$840,000.00
	(To record purchase of assets)

Solution 2:

Depreciation expense on building for 2017 = (Cost - Salvage value) / useful life = ($394,800 - $29,000) / 15 = $24,387

Solution 3:

Depreciation rate SLM = 1/5 = 20%

Depreciation rate - DDB = 20%*2 = 40%

Depreciation expense on land improvement for 2017= $33,600*40% = $13,440