Chapter 9: Q18E (page 529)

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:
Lot
Appraised Value
1
$144,000
2
96,000
3
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.

Short Answer

Expert verified

Cash payment is allotted in ratio 0.3:0.2:0.5 respectively to lot 1:2:3.

Step by step solution

Meaning of Lump-Sum

A lump-sum purchase involves paying a single price for multiple assets. The cost of each asset purchased must be identified based on the relative-market-value method.

Journal entry for lump-sum purchase

Date	Particulars	Debit ($)	Credit ($)
	Land Lot 1	106,500
	Land Lot 2	71,000
	Land Lot 3	177,500
	Cash		355,000
	(Being cash paid for 3 Lots)

Working note:

Lot	Appraisal Fair Value
1	$ 144,000
2	$ 96,000
3	$ 240,000
Total Appraisal Fair Value	$ 480,000

Lot 1:

$\begin{matrix} Appraisal ratio - Lot 1 = \frac{Appraised value of lot 1}{Total appraised value} \\ = \frac{$ 144, 000}{$ 480, 000} \\ = 0.3 \end{matrix}$

Lot 2:

$\begin{matrix} Appraisal ratio - Lot 2 = \frac{Appraised value of lot 1}{Total appraised value} \\ = \frac{$ 96, 000}{$ 480, 000} \\ = 0.2 \end{matrix}$

Lot 3:

$\begin{matrix} Appraisal ratio - Lot 3 = \frac{Appraised value of lot 3}{Total appraised value} \\ = \frac{$ 240, 000}{$ 480, 000} \\ = 0.5 \end{matrix}$

Allocation of cost to each lot:

Lot	Cash paid	X	Ratio	=	Allocated cost ($)
1	$355,000	X	0.3	=	$106,500
2	$355,000	X	0.2	=	71,000
3	$355,000	X	0.5	=	177,500
					$355,000

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Short Answer

Step by step solution

Meaning of Lump-Sum

Journal entry for lump-sum purchase

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