Recording a Lump-Sum Acquisition Freeman Company purchased a tract of land on which were located a...

Recording a Lump-Sum Acquisition

Freeman Company purchased a tract of land on which were located a warehouse and an office building. The cash purchase price was $308,000 plus $22,000 in fees connected with the purchase. The following information relates to the property.

Tax Assessment	Seller’s Book Value	Original Cost
Land	$44,000	$22,000	$22,000
Warehouse	88,000	44,000	132,000
Building	132,000	110,000	176,000

Prepare the journal entry to record this purchase.

Account Name	Dr.	Cr.
Land
Warehouse
Building
Cash

Why use the number in "Tax assessment" instead of "seller's book value"? Thanks.

Expert Solution

Ans :

It is necessary to allocate a lump sum payment to individual items in order to record a fair portion of the lump sum in each of the proper general ledger accounts.

The lump sum payment means that the total cost of was $308,000 plus $22,000 = $ 330,000 has to be allocated among three general ledger accounts: Land, Warehouse & Building Account in their Fair Value ( here Tax assessment is the Fair value ) .

i.e 44,000 : 88,000 & 132,000 = 264,000 ( fair VALUE RATIO)

i.e 1 : 2 : 3 = 6 ( fair VALUE RATIO)

Cash JOURNAL
DATE	Cash Journal	Debit	Credit
?	Land (1/6) Dr.	55,000
	Warehouse (2/6) Dr.	110,000
	Building ( 3/6) Dr.	165,000
	Cash Cr.		330,000
	( Being Assest Purchased in Slump sale recorded by using the fair value proportion 1 : 2 : 3 )

Tax assessment value / Fair value is the most reliable estimate to properly allocate in Buyer’s books , since except land other assets will be depreciated in future . This cost is objective, verifiable, and the best measure of an asset’s fair market value at the time of purchase. Fair market value is the price received for an item sold in the normal course of business (not at a forced liquidation sale). And if they are not properly recorded today our accounts would not present true and fair value and hence the whole purpose of accounts will fail .

Thank u

ekkarill92 answered 1 year ago

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