Question

In: Accounting

Valley Wide Industries recently negotiated a lump-sum purchase of several assets from a company that was...

Valley Wide Industries recently negotiated a lump-sum purchase of several assets from a company that was going out of business. The purchase was completed, and the assets were put into use on March 11, 2018, at a total cash price of $1,575,000. The purchase included land, building, land improvements and a factory. The appraised value of each asset purchased was:

Land                                                                                       $   612,000

                             Building                                                                                      864,000

                             Land improvements                                                                    90,000

                             Factory                                                                                       234,000

                                                                                                                             $ 1,800,000

  • The building has an estimated service life of 15 years and a $51,300 residual value and is to be depreciated using the straight-line method.
  • The company has decided to use the declining-balance method to depreciate the land improvements which have an estimated service life of 8 years. Estimated residual value is zero.

Note. The company uses the nearest whole month rule for calculating straight line and double declining balance depreciation.

  • The company has decided to use the units-of-production method to depreciate the factory. The factory is expected to produce 250,000 units of product over its lifetime and to have a residual value of $4,750. As of December 31, 2018, the factory had produced 34,000 units of product. (Round your depreciation rate per unit to 2 decimal places)

Required:

  1. Complete the chart below by allocating the costs incurred by Valley Wide Industries to the appropriate asset class and total the columns.    (4)
  1. Prepare the journal entries to record the total acquisition cost of the assets on March 11, 2018. (5)
  1. Prepare the adjusting journal entries to record depreciation expense for the year ending December 31, 2018. (6)

Solutions

Expert Solution

Total purchase cost=$ 1575000
Asset class Fair market value Percent of total Purchase cost
a b 1575000*b
Land 612000 0.34 535500
(612000/1800000)
Building 864000 0.48 756000
(864000/1800000)
Land improvements 90000 0.05 78750
(90000/1800000)
Factory 234000 0.13 204750
(234000/1800000)
Totals 1800000 1575000
Journal entry:
Date Account titles Debit Credit
Mar 11,2018 Land 535500
Building 756000
Land improvements 78750
Factory 204750
Cash 1575000
(Purchased various assets)
Adjusting entries:
Date Account titles Debit Credit
Dec 31,2018 Depreciation expense-Building 39150
Depreciation expense-Land improvements 9844
Depreciation expense-Factory 27200
Accumulated depreciation-Building 39150
Accumulated depreciation-Land improvements 9844
Accumulated depreciation-Factory 27200
(To record depreciation expense)
Notes;-
Assets were purchased on March 11.
Hence, compute depreciation for 10 months (Mar to Dec)
Building:
Depreciation expense under straight-line method=(Cost-Residual value)/Useful life*(10/12)=(756000-51300)/15*(10/12)=$ 39150
Land improvements:
Depreciation rate under declining-balance method=1/Useful life=1/8=0.125=12.5%
Depreciation expense=Cost*Depreciation rate*(10/12)=78750*12.5%=9843.75=$ 9844
Factory:
Depreciation expense per unit under units-of-production method=(Cost-Residual value)/Total expected production=(204750-4750)/250000=$ 0.80 per unit
Depreciation expense=Depreciation expense per unit*Units produced in 2018=0.80*34000=$ 27200

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