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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

What is the depreciation method that is used for tax accounting purposes? How is it different than the methods that are required by GAAP to be used for financial accounting purposes?

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.

During 2018, Lora Company completed the following transactions:

Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of\)129,000 and accumulated depreciation of \(74,000) for new equipment.Lora also paid \)55,000 in cash. Fair value of new equipment is \(116,000.Assume the exchange had commercial substance.

Apr. 1 Sold equipment that cost \)12,000 (accumulated depreciation of \(1,000through December 31 of the preceding year). Lora received \)7,100 cashfrom the sale of the equipment. Depreciation is computed on a straightlinebasis. The equipment has a five-year useful life and a residual valueof \(0.

Dec. 31 Recorded depreciation as follows:

Office equipment is depreciated using the double-declining-balancemethod over four years with a \)7,000 residual value.

Record the transactions in the journal of Lora Company.

Core Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Core purchased goodwill as part of the acquisition of Surety Wireless Company, which had the following figures:

Book value of assets \( 700,000

Market value of assets 1,000,000

Market value of liabilities 510,000

Requirements

1. Journalize the entry to record Core’s purchase of Surety Wireless for \)280,000 cash plus a $420,000 note payable.

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

Whitney Plumb Associates surveys American eating habits. The company’s accounts include Land, Buildings, Office Equipment, and Communication Equipment, witha separate Accumulated Depreciation account for each asset. During 2018, WhitneyPlumb completed the following transactions:

Jan. 1 Purchased office equipment, \(117,000. Paid \)77,000 cash and financedthe remainder with a note payable.

Apr. 1 Acquired land and communication equipment in a lump-sumpurchase. Total cost was \(350,000 paid in cash. An independentappraisal valued the land at \)275,625 and the communication equipmentat \(91,875.

Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000through December 31 of the preceding year). Whitney Plumb received\)390,000 cash from the sale of the building. Depreciation is computed ona straight-line basis. The building has a 40-year useful life and a residualvalue of \(25,000.

Dec. 31 Recorded depreciation as follows:

Communication equipment is depreciated by the straight-line methodover a five-year life with zero residual value.Office equipment is depreciated using the double-declining-balancemethod over five years with a \)2,000 residual value.

Record the transactions in the journal of Whitney Plumb Associates.
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