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, $534,600; land, $316,800; land improvements, $39,600; and four vehicles, $99,000.

Answer 1

Answer 1a: Several assets are purchased by Timberly Construction at a cash price of $810,000. The estimated market value of these assets are provided in the question. As the cash price of the individual assets is not available, the cash price of $810,000 would be allocated to different assets in the ratio of their market values. Therefore the cash price of $810,000 would be allocated to building, land, land improvements, and four vehicles in the ratio of 534,600 : 316,800 : 39,600 : 99,000. Dividing all these numbers with 39,600, the ratio becomes 13.5 : 8 : 1 : 2.5.

Allocation of cash value of $810,000 to different assets:

Building = ($810,000 * 13.5)/25 = $437,400.

Land = ($810,000 * 8)/25 = $259,200.

Land improvements = ($810,000 * 1)/25 = $32,400.

Four vehicles = ($810,000 * 2.5)/25 = $81,000.

Answer 1b:

Journal entry to record the purchase:

January 1 Building $437,400

Land $259,200

Land improvements $32,400

Vehicles (four) $81,000

Cash / Bank $810,000

(Being entry recorded for purchase of assets)

Answer 2: Calculation of depreciation expense on the building using straight line method:

Cost of the building = $437,400 (Calculated above)

Useful life of building = 15 years (given in the question)

Salvage value of the building = $31,000 (given in the question)

The formula for calculating depreciation expense as per straight line method is:

Depreciation = (Cost - Salvage value) / Useful life of the asset

Calculation of first year depreciation expense on the building:

Depreciation = (Cost - Salvage value) / Useful life

Depreciation = ($437,400 - $31,000) / 15

Depreciation = $27,093.3333 = $27,093 (rounded off).

Therefore, the first year depreciation expense on building is $27,093.