Question

Facts: The Jacobson Family Farm is located down the road from Green Acres Sod Company. When Dale Jacobson passed away the farm went up for auction and at $800,000 Green Acres made the winning bid! After paying the auctioneer commission and all closing fees the sod company was in for a total purchase price of $828,200 (which is still a good deal when compared to the $1,025,000 appraised value publicized by the auction house prior to the sale).

Bid for property $800,000

Auctioneer Commission 20,000

Total Auction Price $820,000

Attorney Fees & Closing Cost 8200

Total Purchase Price $828,200

The farm purchase was finalized March 1, 2018 and included the following 4 distinct assets: 80 acres of land, the Jacobson’s 4-bedroom historic farmhouse, various pieces of equipment and some old run-down barns scattered throughout the 80 acres. The auction house provided the following individual appraised values for each asset:

80 acres $660,000

4 bedroom Farmhouse $315,000

equipment $50,000

barns $0

Total $1,025,000

It is Green Acres intention to use the farmhouse as office space and the 80 acres to grow sod. During March 2018, Green Acres incurred $71,200 of additional cost as shown below:

$8,000 to repair and recondition the used farm equipment for damage that already existed at the time of the auction

$12,000 to demolish and remove the old barns*

(1,800) *Green Acres was able to sell 225 planks of barnwood salvages form the demolition at $8 per plank.

18,000 to re-grade the land & remove tree stumps making it suitable for planting sod.

35,000 remodeling for office space in farmhouse

Total: $ 71,200

Also, in March, Green Acres purchased a new irrigation system. The system was listed in the vendor’s catalog at a selling price of $115,000 but Green Acres was able to negotiate a 10% trade discount and payment terms of 1/5, n/30. The system was ordered March 8 and shipped FOB shipping point on March 18 with $2,500 of freight prepaid. The system was delivered March 19. Green Acres paid the balance due to the vendor on March 21 and then spent an additional $2,000 in labor to install the system and another $1,000 in labor to test it.

Finally, in October 2018, when harvest was over, Green Acres spent $1,200 winterizing the equipment and $800 winterizing the irrigation system. Winterizing is a common practice and while it doesn’t improve the assets it does insure they maintain their condition during the colder months such that they are ready to be used in spring.

Requirements: Show all work! Consider all facts from page 1 when answering these questions.

Assume Green Acres started using the farm & irrigation system for official business on April 1, 2018.

1. Prepare the long-lived asset section for the company’s April 1, 2018 balance sheet.
2. Record the company’s depreciation for 2018 assuming Green Acres uses the straight-line depreciation method and utilizes a 10% residual value for all depreciable assets. Additionally, the company assumes an estimated useful life of 18 years for all depreciable assets except equipment which is 8 years.
3. Prepare the long-lived asset section for the company’s 12/31/2018 balance sheet.
4. Explain any expenditure from the facts that has not already been reflected in your above answers. Prepare the entry to record the item(s) not included above.

Answer 1

1. the long-lived asset section for the company’s April 1, 2018 balance sheet.

   Long lived Assets April 1, 2018

   Long lived Assets	Amount
   80 acres of land	$551,280
   4 bedroom Farmhouse	$289,520
   equipment	$48,400
   barns	$10,200
   New irrigation system	$133,060
   Total long loved asset	$1,032,460

Working Note

Total purchase price of farm = Bid for property + Auctioneer Commission + Attorney Fees & Closing Cost

Total purchase price of farm = $800,000 +$20,000 +$8,200

Total purchase price of farm = $828,200

Allocation of farm purchase price to different assets in its appraised value ratio

80 acres : 4 bedroom Farmhouse : equipment : barns

$660,000 : $315,000 : $50,000 : 0

So,

Long lived Assets	Amount	Working
80 acres of land	$533,280	($828,200/$1,025,000)*$660,000
4 bedroom Farmhouse	$254,520	($828,200/$1,025,000)*$315,000
equipment	$40,400	($828,200/$1,025,000)*50,000
barns	$0	($828,200/$1,025,000)*0

now,

repairs added to the total cost of asset

Long lived Assets	Amount	Working
80 acres of land	$551,280	$533,280 + $18,000
4 bedroom Farmhouse	$289,520	$254,520 + $35,000
equipment	$48,400	$40,400 + $8,000
barns	$10,200	$12,000 - $1,800

New irrigation system

Selling price by vendor	$115,000
trade discount 10%	$11,500
Payment made within 5days discount (115,000 - 11,500 + 2,500)*1%	$1,060
Freight prepaid	$2,500
Labor to install and test (2,000 + 1,000)	$3,000
Total cost	$133,060

2. depreciation

Long lived Assets	Working	Amount
4 bedroom Farmhouse	[($289,520*0.9)/18]9/12	10,857.00
equipment	[($48,400*0.9)/8]9/12	4,083.75
barns	[($10,200*0.9)/18]9/12	382.50
New irrigation system	[($133,060*0.9)/18]9/12	4,989.75
Total depreciation		$20,313.00

Straight line depreciation = (cost of asset - salvage value)/useful life of asset

3.

Long lived Assets Dec 31,2018

Long lived Assets	Working		Amount
80 acres of land	$551,280	$	551,280.00
4 bedroom Farmhouse	($289,520 - $10,857)		278,663.00
equipment	($48,400 - $4,083.75)		44,316.25
barns	($10,200 - $382.5)		$9,817.5
New irrigation system	($133,060 - $4,989)		$126,407
Total Long lived Assets			$1,012,147.00

4. Green Acres spent $1,200 winterizing the equipment and $800 winterizing the irrigation system. This amount will not be included in the cost of the asset as it does no improve the asset. It will be treated as a normal expenditure.