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Logic Co. recently negotiated a lump-sum purchase of several assets from a company that was going out of business. The purchase was completed on March 1, 2020, at a total cash price of $1,340,000 and included a building, land, certain land improvements, and 12 vehicles. The estimated market values of the assets were building, $619,200; land, $518,400; land improvements, $86,400; and vehicles, $216,000. The company’s fiscal year ends on December 31.
Required:
1. Complete the following schedule to allocate the lump-sum purchase price to the separate assets that were purchased. Also present the journal entry to record the purchase.
2. Calculate the 2020 depreciation expense on the building using the straight-line method to the nearest whole month, assuming a 15-year life and a $20,000 residual value.
3. Calculate the 2020 depreciation expense on the land improvements assuming a five-year life, $10,000 residual, and double-declining-balance depreciation calculated to the nearest whole month.
1) A schedule to allocate the lump-sum purchase price to the separate assets that were purchased is as follows:
| Allocation of total cost | Appraised Value | % of total appraised value | × | Total cost of acquisition | = | Apportioned cost |
| Building | 619,200 | 43.00% | × | 1,340,000 | = | 576,200 |
| Land | 518,400 | 36.00% | × | 1,340,000 | = | 482,400 |
| Land improvements | 86,400 | 6.00% | × | 1,340,000 | = | 80,400 |
| Vehicles | 216,000 | 15.00% | × | 1,340,000 | = | 201,000 |
| Total | 1,440,000 | 100.00% | × | 1,340,000 | = | 1,340,000 |
Journal Entry to record the purchase is as follows:
| Date | Account and Explanation | Debit ($) | Credit($) |
| Mar. 1, 2020 | Building | 576,200 | |
| Land | 482,400 | ||
| Land Improvement | 80,400 | ||
| Vehicle | 201,000 | ||
| Cash | 1,340,000 | ||
| (Recorded thelump-sum purchase of several assets) |
2) Depreciation expense on the building using the straight-line method is calcutated as follows:
Depreciation expense = (Cost - Salvage Value) / Useful Life
= ($576,200 - $20,000) / 15 Years
= $556,200 / 15
= $37,080
Depreciation expense for 10 months (March 1, 2020 to December 31, 2020) = $37,080 × 10/12
= $30,900
Depreciation expense on the building using the straight-line method is $30,900
3) Depreciation expense on the land improvements under double-declining-balance depreciation is as follows:
Depreciation expense = 2 * (Purchase Price / Useful Life)
= 2 × ($80,400 / 5 Years)
= $32,160
Depreciation expense for 10 months (March 1, 2020 to December 31, 2020) = $32,160 × 10/12
= $26,800
Depreciation expense on the land improvements under double-declining-balance depreciation is $26,800
