Question

Problem 10-1A Plant asset costs; depreciation methods 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 $900,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, $508,800; land, $297,600; land improvements, $28,800; and four vehicles, $124,800. The company’s fiscal year ends on December 31.

Required

Prepare a table to allocate the lump-sum purchase price to the separate assets purchased (round percents to the nearest 1%). Prepare the journal entry to record the purchase.

Compute the depreciation expense for year 2017 on the building using the straight-line method, assuming a 15-year life and a $27,000 salvage value.

Check (2) $30,000

Compute the depreciation expense for year 2017 on the land improvements assuming a five-year life and double-declining-balance depreciation.

(3) $10,800

Analysis Component

Defend or refute this statement: Accelerated depreciation results in payment of less taxes over the asset’s life.

Answer 1

1)

assets	Appraised value	Percentage of Appraised value	total cash price of assets	allocation of lump-sum purchase price to the separate assets
building	$508,800	0.53	$900,000	477000
land	$297,600	0.31	$900,000	279000
land improvements	$28,800	0.03	$900,000	27000
four vehicles	$124,800	0.13	$900,000	117000
	$960000	100%		$900000

journal entry to record the purchase :

Date	Accounts title	Dr	Cr
January 1, 2017	building	477000
	land	279000
	land improvements	27000
	four vehicles	117000
	To cash		900000

2.)   depreciation expense for year 2017 on the building = [(477000 - $27,000) /15-year life ]

= $450000 /15

= $30000

3) double-declining-balance depreciation

Straight line depreciation rate = 1 / 5 * 100

=20%

  double-declining-balance depreciation rate = 2 * 20%

= 40%

Year Opening value Depreciation rate Depreciation expense Ending book value

2017 $27000 40% $10800 $16200

depreciation expense for year 2017 on the land improvements = $10800