Question

Timberly Construction negotiates a lump-sum purchase of several assets from a company that is going out of business. The purchase is completed on January 1, 2017, at a total cash price of $850,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, $471,750; land, $286,750; land improvements, $46,250; and four vehicles, $120,250. The company’s fiscal year ends on December 31.

Required:

1-a. Prepare a table to allocate the lump-sum purchase price to the separate assets purchased.
1-b. Prepare the journal entry to record the purchase.
2. Compute the depreciation expense for year 2017 on the building using the straight-line method, assuming a 15-year life and a $29,000 salvage value.
3. Compute the depreciation expense for year 2017 on the land improvements assuming a five-year life and double-declining-balance depreciation.

Answer 1

1a) Allocation of lump sum purchase price

Assets	Market values	Weight	Allocation of lump sum price
Building	471750	0.51	850000*.51 = 433500
Land	286750	0.31	850000*.31 = 263500
Land improvement	46250	0.05	850000*.05 = 42500
Vehicles	120250	0.13	850000*.13 = 110500
Total	925000		850000

1b) Journal entry

Date	account and explanation	debit	credit
	Building	433500
	Land	263500
	Land improvement	42500
	Four vehicle	110500
	Cash		850000
	(To record purchase)

2) Depreciation expense for building = (433500-29000/15) = 26967

3) Depreciation expenses for land improvement = 42500*40% = 17000