Question

Timberly Construction makes a lump-sum purchase of several assets on January 1 at a total cash price of $810,000. The estimated market values of the purchased assets are building, $456,000; land, $247,000; land improvements, $66,500; and four vehicles, $180,500.

Required:

1-a. Allocate the lump-sum purchase price to the separate assets purchased.
1-b. Prepare the journal entry to record the purchase.
2. Compute the first-year depreciation expense on the building using the straight-line method, assuming a 15-year life and a $30,000 salvage value.
3. Compute the first-year depreciation expense on the land improvements assuming a five-year life and double-declining-balance depreciation.

Answer 1

1)

A

Cash paid for total Assets = $ 810000

total Fair Value of Assets = 456000 + 247000 + 66500 + 180500

= $ 950000

Allocation of Cost to Assets ( ( Fair Value of Asset / total Fair Value of assets ) * Cash paid ) )

building Cost = ( 456000 / 950000 ) * 810000

= $ 388800

land = ( 247000 / 950000 ) * 810000

= $ 210600

land improvements

= ( 66500 / 950000 ) * 810000

= $ 56700

four Vehicles

= ( 180500 / 950000 ) * 810000

= $ 153900

1b)

Date	Accounts Name	Debit ($)	Credit ( $)
1 b	buildings	388800
	land	210600
	land improvements	56700
	four Vehicles	153900
	Cash		810000

2)

Straight line depreciation

= ( cost – Salvage value ) / useful life of the asset

= ( 388800 - 30000 ) / 15

= $ 23920 per year

3)

cost of the land improvements = $ 56700

Double declining method

Depreciation = = ( cost – Residual value ) / useful life of the asset

= ( 56700 - 0 ) / 5

= $ 11340 per year

Depreciable base = Cost – residual Value

= 56700 - 0

= $ 56700

Depreciation rate = (Straight line depreciation * 100 ) / depreciable base

= ( 113400 * 100 ) / 56700

= 20 %

Double declining rate = 2 * 20%

= 40 %

depreciation Expense

= 56700 * 40%

= $ 22680