Nagy Company makes a lump-sum purchase of several assets on January 1 at a total cash price of $1,800,000. The estimated market values of the purchased assets are building, $890,000; land, $427,200; land improvements, $249,200; and five trucks, $213,600. Required 1. Allocate the lump-sum purchase price to the separate assets purchased. Prepare the journal entry to record the purchase. 2. Compute the first-year depreciation expense on the building using the straight-line method, assuming a 12-year life and a $120,000 salvage value. 3. Compute the first-year depreciation expense on the land improvements assuming a 10-year life and double-declining-balance depreciation. Analysis Component 4. Compared to straight-line depreciation, does accelerated depreciation result in payment of less total taxes over the asset’s life?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Nagy Company makes a lump-sum purchase of several assets on January 1 at a total cash price of
$1,800,000. The estimated market values of the purchased assets are building, $890,000; land, $427,200;
land improvements, $249,200; and five trucks, $213,600.
Required
1. Allocate the lump-sum purchase price to the separate assets purchased. Prepare the
record the purchase.
2. Compute the first-year
a 12-year life and a $120,000 salvage value.
3. Compute the first-year depreciation expense on the land improvements assuming a 10-year life and
double-declining-balance depreciation.
Analysis Component
4. Compared to straight-line depreciation, does accelerated depreciation result in payment of less total
taxes over the asset’s life?
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