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Chapter 9: Q2SE (page 526)

Making a lump-sum asset purchase

Concord Pet Care Clinic paid \(210,000 for a group purchase of land, building, and equipment. At the time of the acquisition, the land had a market value of \)110,000, the building \(88,000, and the equipment \)22,000. Journalize the lump-sum purchase of the three assets for a total cost of $210,000, the amount for which the business signed a note payable.

Short Answer

Expert verified

Cash payment is allocated as:

Land

$105,000

Building

$84,000

Equipment

$21,000

Step by step solution

01

Definition of Lump-sum Purchase

Lump-sum purchase is when various assets like land, equipment, etc., are purchased together at a single price.

02

Journal entry for recording the lump-sum purchase:

Date

Accounts and Explanation

Debit ($)

Credit ($)

Land

105,000

Building

84,000

Equipment

21,000

Cash

210,000

(To record the lump-sum purchase of assets)

Working note:

Calculation of total market value:

Particular

Amount ($)

Land

$110,000

Building

88,000

Equipment

22,000

Total market value

$220,000

Calculation of allocation percentage:

Particular

Market value

/

Total market value

=

Allocation ratio

Land

$110,000

/

$220,000

=

0.5

Building

$88,000

/

$220,000

=

0.4

Equipment

$22,000

/

$220,000

=

0.1

Allocation of cash paid:

Particular

Total cash paid

X

Allocation ratio

=

Cash paid for asset

Land

$210,000

X

0.5

=

$105,000

Building

$210,000

X

0.4

=

$84,000

Equipment

$210,000

X

0.1

=

$21,000

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Most popular questions from this chapter

Jim Reed manages a fleet of utility trucks for a rural county government. He’s been in his job for 30 years, and he knows where the angles are. He makes sure that when new trucks are purchased, the residual value is set as low as possible. Then, when they become fully depreciated, they are sold off by the county at residual value. Jim makes sure his buddies in the construction business are first in line for the bargain sales, and they make sure he gets a little something back. Recently, a new county commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this man has a business degree, and he is coming to visit Jim tomorrow.

Requirements

1. When a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?

2. How do businesses determine what residual values to use for their various assets? Are there “hard and fast” rules for residual values?

3. How would an organization prevent the kind of fraud depicted here?

Alpha Communication purchased equipment on January 1, 2018, for \(27,500. Suppose Alpha Communication sold the equipment for \)20,000 on December 31, 2020. Accumulated Depreciation as of December 31, 2020, was $10,000. Journalize the sale of the equipment, assuming straight-line depreciation was used.

Amplify Petroleum holds huge reserves of oil. Assume that at the end of 2017, Amplify Petroleum’s cost of oil reserves totaled $80,000,000, representing 100,000,000 barrels of oil. Suppose Amplify Petroleum removed and sold 20,000,000 barrels of oil during 2018. Journalize depletion expense for 2018.

Plant assets are recorded at historical cost. What does the historical cost of a plant asset include?

Accounting for intangibles

Midland States Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Midland States Telecom purchased goodwill as part of the acquisition of Sheldon Wireless Enterprises, which had the following figures:

Book value of assets \( 900,000

Market value of assets 1,400,000

Market value of liabilities 530,000

Requirements

1. Journalize the entry to record Midland States Telecom’s purchase of Sheldon Wireless for \)440,000 cash plus a $660,000 note payable.

2. What special asset does Midland States Telecom’s acquisition of Sheldon Wireless identify? How should Midland States Telecom account for this asset after acquiring Sheldon Wireless? Explain in detail.
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