Question

E9-18 Making a lump-sum purchase of assets Maplewood Properties bought three lots in a subdivision for a lump-sum price. An independent appraiser valued the lots as follows: dearcdeser Lot Appraised Value $ 144,000 96,000 240,000 Maplewood paid $355,000 in cash. Record the purchase in the journal, identifying each lot's cost in a separate Land account. Round decimals to two places, and use the computed percentages throughout.

Answer 1

Inputs from the question

Total cash outflow : $ 355,000

Fair value of each lot

Lot	Appraised value ($)
1	144,000
2	96,000
3	240,000
Total	480,000

Required : Journal entry for purchase transaction with separate cost allocation to each Lot

Solution

The fair value of the lots ($480,000) exceeds the total cash paid ($ 355,000) for purchase of lots. As asked in the question, the amount paid needs to be allocated to each lot separately. For this purpose, we need to calculate the ratio in which the total cost allocation to be made, which can be done on the basis of fair value of each lot.

Ratio for LOT 1 :

• (LOT 1 appraised value / Total appraised value)
• $144,000/ $480,000 = 0.3

Ratio for LOT 2 :

• (LOT 2 appraised value / Total appraised value)
• $96,000/ $480,000 = 0.2

Ratio for LOT 3 :

• (LOT 3 appraised value / Total appraised value)
• $240,000/ $480,000 = 0.5

Hence, total cost of $355,000 will be allocated to each LOT in the ratio of 0.3 : 0.2 : 0.5 for Lot 1, 2 and 3 respectively.

Cost Allocation to each lot:

LOT	Calculation	Allocated Cost
1	$355,000*0.3	$106,500
2	$355,000*0.2	$71,000
3	$355,000*0.5	$177,500
TOTAL		$355,000

Journal Entry for recording purchase transaction:

A/c	Dr.	Cr.
Land (Lot 1) A/c	$106,500
Land (Lot 2) A/c	$71,000
Land (Lot 3) A/c	$177,500
Cash A/c		$355,000
Being cash paid of purchase of 3 Lots