Valley Wide Industries recently negotiated a lump-sum purchase of several assets from a company that was going out of business. The purchase was completed, and the assets were put into use on March 11, 2018, at a total cash price of $1,575,000. The purchase included land, building, land improvements and a factory. The appraised value of each asset purchased was:
Land $ 612,000
Building 864,000
Land improvements 90,000
Factory 234,000
$ 1,800,000
The building has an estimated service life of 15 years and a $51,300 residual value and is to be depreciated using the straight-line method.
The company has decided to use the declining-balance method to depreciate the land improvements which have an estimated service life of 8 years. Estimated residual value is zero.
Note. The company uses the nearest whole month rule for calculating straight line and double declining balance depreciation.
The company has decided to use the units-of-production method to depreciate the factory. The factory is expected to produce 250,000 units of product over its lifetime and to have a residual value of $4,750. As of December 31, 2018, the factory had produced 34,000 units of product. (Round your depreciation rate per unit to 2 decimal places)
Required:
Complete the chart below by allocating the costs incurred by Valley Wide Industries to the appropriate asset class and total the columns. (4)
Prepare the journal entries to record the total acquisition cost of the assets on March 11, 2018. (5)
Prepare the adjusting journal entries to record depreciation expense for the year ending December 31, 2018. (6)
Total purchase cost=$ 1575000 | |||||||
Asset class | Fair market value | Percent of total | Purchase cost | ||||
a | b | 1575000*b | |||||
Land | 612000 | 0.34 | 535500 | ||||
(612000/1800000) | |||||||
Building | 864000 | 0.48 | 756000 | ||||
(864000/1800000) | |||||||
Land improvements | 90000 | 0.05 | 78750 | ||||
(90000/1800000) | |||||||
Factory | 234000 | 0.13 | 204750 | ||||
(234000/1800000) | |||||||
Totals | 1800000 | 1575000 | |||||
Journal entry: | |||||||
Date | Account titles | Debit | Credit | ||||
Mar 11,2018 | Land | 535500 | |||||
Building | 756000 | ||||||
Land improvements | 78750 | ||||||
Factory | 204750 | ||||||
Cash | 1575000 | ||||||
(Purchased various assets) | |||||||
Adjusting entries: | |||||||
Date | Account titles | Debit | Credit | ||||
Dec 31,2018 | Depreciation expense-Building | 39150 | |||||
Depreciation expense-Land improvements | 9844 | ||||||
Depreciation expense-Factory | 27200 | ||||||
Accumulated depreciation-Building | 39150 | ||||||
Accumulated depreciation-Land improvements | 9844 | ||||||
Accumulated depreciation-Factory | 27200 | ||||||
(To record depreciation expense) | |||||||
Notes;- | |||||||
Assets were purchased on March 11. | |||||||
Hence, compute depreciation for 10 months (Mar to Dec) | |||||||
Building: | |||||||
Depreciation expense under straight-line method=(Cost-Residual value)/Useful life*(10/12)=(756000-51300)/15*(10/12)=$ 39150 | |||||||
Land improvements: | |||||||
Depreciation rate under declining-balance method=1/Useful life=1/8=0.125=12.5% | |||||||
Depreciation expense=Cost*Depreciation rate*(10/12)=78750*12.5%=9843.75=$ 9844 | |||||||
Factory: | |||||||
Depreciation expense per unit under units-of-production method=(Cost-Residual value)/Total expected production=(204750-4750)/250000=$ 0.80 per unit | |||||||
Depreciation expense=Depreciation expense per unit*Units produced in 2018=0.80*34000=$ 27200 | |||||||
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