Timberly Construction negotiates a lumpsum purchase of sever

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, $524,700; land, $267,300; land improvements, $49,500; and four vehicles, $148,500. 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 $30,000 salvage value.
3. Compute the depreciation expense for year 2017 on the land improvements assuming a five-year life and double-declining-balance depreciation.

Solution

Whenever the An Assets are Purchased on Lump sum then their assets are to be segregated based on fair value divided by total fair value and Multiplied by total amount paid

1.a.

Asset                                   Fair Value      % of total Fair Value       % of total Fair Value*Amount Paid

Building                                   $524700             0.53%                                    0.53%*850000=$450,500              

Land                                        $267300              0.27%                                    0.27%*850000=$229,500

Land Improvements           $49500              0.05%                                    0.05%*850000=$42,500

Four Vehicles                     $148500               0.15%                                    0.15%*850000=$127,500

Total                                    $990,000                1                                                                            $850,000

1.b

Journal Entry

Building                               $450500

Land                                      $229500

Land Improvements      $42500

Four vehicles                     $127500

                  Cash                                                    $850,000

2. Depreciation expenses for the building is

Asset value –Salvage value/No of years Expected Life

450500-30000/15=$28033

3. Compute the depreciation expense for year 2017 on the land improvements assuming a five-year life and double-declining-balance depreciation.

Computation of depreciation for land improvements:

Depreciation for land improvements can only charged of the expected life measured separately so here provided for 5 years

Depreciation expense for land Improvements for the year 2017

=Land Improvements value/No of years *2

=$42500/5*2=$17000