Chapter 8, Problem 1PSA

PROBLEM SET A

Problem 8−1A

Plant asset costs; depreciation methods

C1 P1

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, 2015, at a total cash price of $900,000 for a building, land, land improvement, and four vehicles. The estimated market values of the assets are building, $508,800; land, $297,600; land improvement, $28,800; and four vehicles, $124,800. The company’s fiscal year ends on December 31.

Required

1. Prepare a table to allocate the lump-sum purchase price to the separate assets purchased (round percents to the nearest 1%). Prepare the journal entry to record the purchase.
2. Compute the depreciation expense for year 2015 on the building using the straight-line method, assuming a 15-year life and a $27,000 salvage value.
3. Compute the depreciation expense for year 2015 on the land improvements assuming a five-year life and double-declining-balance depreciation.

Analysis Component

Defend or refute this statement: Accelerated depreciation results in payment of less taxes over the asset’s life.