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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

01

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.

02

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:

Appraisalratio-Lot1=Appraisedvalueoflot1Totalappraisedvalue=$144,000$480,000=0.3

Lot 2:

Appraisalratio-Lot2=Appraisedvalueoflot1Totalappraisedvalue=$96,000$480,000=0.2

Lot 3:

Appraisalratio-Lot3=Appraisedvalueoflot3Totalappraisedvalue=$240,000$480,000=0.5

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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Most popular questions from this chapter

Discarding of a fully depreciated asset On June 15, 2017, Family Furniture discarded equipment that cost \(27,000, a residual value of \)0, and was fully depreciated. Journalize the disposal of the equipment.

Determining the cost of assets Lawson Furniture purchased land, paying \(65,000 cash and signing a \)250,000 note payable. In addition, Lawson paid delinquent property tax of \(5,000, title insurance costing \)4,000, and \(9,000 to level the land and remove an unwanted building. The company then constructed an office building at a cost of \)400,000. It also paid \(54,000 for a fence around the property, \)12,000 for a sign near the entrance, and $8,000 for special lighting of the grounds. Requirements

  1. Determine the cost of land, land improvements, and building.
  2. Which of these assets will Lawson depreciate?

Journalizing partial-year depreciation and asset disposals and exchanges.

During 2018, Mora Corporation completed the following transactions:

Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of \)127,000 and accumulated depreciation of \(72,000) for new equipment. Mora also paid \)70,000 in cash. Fair value of new equipment is \(133,000. Assume the exchange had commercial substance.

Apr. 1 Sold equipment that cost \)18,000 (accumulated depreciation of \(8,000 through December 31 of the preceding year). Mora received \)6,100 cash from the sale of the equipment. Depreciation is computed on a straightline basis. The equipment has a five-year useful life and a residual value of \(0. Dec. 31 Recorded depreciation as follows:

Office equipment is depreciated using the double-declining-balance method over four years with a \)9,000 residual value.

Record the transactions in the journal of Mora Corporation.

: Distinguishing capital expenditures from revenue expenditures consider the following expenditures:

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c. Lubrication before machinery is placed in service.

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e. Major overhaul to extend useful life by three years.

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g. Transportation and insurance while machinery is in transit from seller to buyer.

h. Installation.

i. Training of personnel for initial operation of the machinery. Classify each of the expenditures as a capital expenditure or revenue expenditure

Question: Accounting for natural resources Conseco Oil, Inc. has an account titled Oil and Gas Properties. Conseco paid \(6,600,000 for oil reserves holding an estimated 1,000,000 barrels of oil. Assume the company paid \)570,000 for additional geological tests of the property and $450,000 to prepare for drilling. During the first year, Conseco removed and sold 72,000 barrels of oil. Record all of Conseco’s transactions, including depletion for the first year.
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