2. United Alliance Inc. paid $1,000,000 to purchase land and equipment as a package at the...
2. United Alliance Inc. paid $1,000,000 to purchase land and equipment as a package at the beginning of 2018. If the land and equipment are sold separately, land would be priced at 650,000 and equipment would be priced at $450,000. United Alliance estimated the useful life of the equipment to be 5 years with the salvage value of $50,000 or 800,000 units. The equipment produced 50,000 units in 2018. (30 marks)
Required:
a.Determine the purchase price for the land and the equipment and prepare the journal entry for the purchases.
b.Calculate depreciation expense for 2018 under each of the following methods for the equipment:
i.straight-line
ii.units-of-production
iii.double-declining-balance
Homework Answers
| SOLUTION :A | ||||||
| CALCULATION OF RATIO OF ASSETS PURCHASE ON FAIR MARKET VALUE | ||||||
| ASSETS | MARKET VALUE | Ratio in % | ||||
| Land | $ 6,50,000 | 59.09% | ||||
| Equipment | $ 4,50,000 | 40.91% | ||||
| Total | $ 11,00,000 | 100.00% | ||||
| ASSETS | Total Purchase Value | Ratio in % | Basis of Assets | |||
| Land | $ 10,00,000 | 59.09% | $ 5,90,909 | |||
| Equipment | $ 10,00,000 | 40.91% | $ 4,09,091 | |||
| Total | 100.00% | $ 10,00,000 | ||||
| Journal Entries | ||||||
| Date | Account Title and explanation | Debit | Credit | |||
| 2018 | Land | $ 5,90,909 | ||||
| Equipment | $ 4,09,091 | |||||
| Cash | $ 10,00,000 | |||||
| SOLUTION B: 1 | ||||||
| CALCULATION OF THE DEPRECIATION AS PER STRAIGHT LINE METHOD | ||||||
| Purchase Cost of Equipment | $ 4,09,091 | |||||
| Less: Salvage Value | $ 50,000 | |||||
| Net Value for Depreciation (A) | $ 3,59,091 | |||||
| Usefule life of the Assets (B) | 5 | Years | ||||
| Depreciation per year = Value for Depreciation (A/B) | $ 71,818 | |||||
| Depreciation for the year 2018 as per Straight Lune = $ 71,818 | ||||||
| SOLUTION B: 2 | ||||||
| CALCULATION OF THE DEPRECIATION AS PER UOP METHOD | ||||||
| Purchase Cost of Equipment = | $ 4,09,091 | |||||
| Less: Salvage Value = | $ 50,000 | |||||
| Net Value for Depreciation (A) | $ 3,59,091 | |||||
| Expected to Produce in Units (B) | 8,00,000 | Units | ||||
| Depreciation per Units = (A/B) | $ 0.45 | Per Units | ||||
| DEPRECIATION SCHEDULE - UNIT OF PRODUCTION METHOD | ||||||
| DEPRECIATION EXPENSS OF THE YEAR | ||||||
| Year | Units Produced | X | Rate Per Unit | = | Depreciaiton Expenses | |
| Year 2018 | 50,000 | X | $ 0.45 | = | $ 22,443 | |
| Depreciation for the year 2018 as per Unit of Production = $ 22,443 | ||||||
| SOLUTION B: 3 | ||||||
| CALCULATION OF THE DEPRECIATION AS PER DOUBLE DECLINE METHOD | ||||||
| Purchase Cost of Equipment = | $ 4,09,091 | |||||
| Rate of Depreciation = | ||||||
| Rate of Depreciation = (1 / 5 Years ) | 0.20 or 20.00% | |||||
| (Depreication / Purchase price ) | ||||||
| Double decline deprection rate = 20 % * 2 = | 40.0% | |||||
| DEPRECIATION SCHEDULE - DOUBLE DECLINE BALANCE | DEPRECIATION EXPENSS OF THE YEAR | |||||
| Year | Beginning Book Value | X Depreciation Rate | = | Depreciaiton Expenses | ||
| Dec.31 2018 | $ 4,09,091 | 40% | = | $ 1,63,636 | ||
| Depreciation for the year 2018 as per Double Declining Balance = $ 163,636 | ||||||
|
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