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 $850,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, $470,400; land, $333,200; land improvements, $29,400; and four vehicles, $147,000. 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

1-a. Prepare a table to allocate the lump-sum purchase price to the separate assets purchased.

Assets	Individual fair market value	Allocated ratio	Allocated cost
Building	470400	470400/980000 = 48%	408000
Land	333200	333200/980000 = 34%	289000
Land improvements	29400	29400/980000 = 3%	25500
Four vehicles	147000	147000/980000 = 15%	127500
Total	980000		850000

Journal entry

Date	account and explanataion	debit	credit
Jan 1	Building	408000
	Land	289000
	Land improvement	25500
	Four vehicle	127500
	Cash		850000
	(To record lump sum purchase)

Journal entry

Date	account and explanation	debit	credit
Dec 31	Depreciation expense (408000-31000/15)	25133
	Accumlated depreciation-Building		25133
	(To record dep)

Journal entry

Date	account and explanation	debit	credit
Dec 31	Depreciation expense (25500*40%)	10200
	Accumlated depreciation-Land improvement		10200
	(To record dep)