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, $537,300; land, $268,650; land improvements, $59,700; and four vehicles, $129,350. 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)

ALLOCATION OF AMOUNT PAID
	Market value	market value weights	Cost allocated
Building	537300	537300/995000= .54	850000*.54= 459000
Land	268650	268650/995000= .27	850000*.27= 229500
Land improvements	59700	59700/995000= .06	51000
Four vehicles	129350	129350/995000= .13	110500
Total market value	995000		850000

1-b)

Date	Account title	Debit	credit
1 Jan 2017	Building	459000
	Land	229500
	Land improvements	51000
	Four vehicles	110500
	cash		850000

2)Depreciation expense =[cost-salvage value ]/useful life

           = [459000-31000]/15

              = 28533.33

Date	Account title	Debit	credit
31Dec 2017	Depreciation expense -Building	28533
	Accumulated depreciation-Building		28533

3)double declining depreciation rate : 2/ useful life

                       = 2/5

                        = .40 or 40%

Date	Account title	Debit	credit
31Dec 2017	Depreciation expense -land improvement (51000*.40)	20400
	Accumulated depreciation-Land improvement		20400