Chapter 8, Problem 3AP

1.

To determine

Prepare a table to allocate the costs incurred by Company M.

Explanation of Solution

Lump-Sum purchase:

If a company purchases a group of assets collectively and a lump sum amount is paid for such purchase, then it is referred to as basket purchase. The accounting term for this type of acquisition is the lump-sum purchase.

Compute the total cost of the assets as follows:

Table (1)

Prepare a table to allocate the costs incurred by Company M as follows:

Assets	Fair Market Value (in $)	Percent of total=$\frac{\left(\begin{array}{l}\text{Market value of }\\ \text{specific asset}\end{array}\right)}{\left(\begin{array}{l}\text{Market value of }\\ \text{total assets}\end{array}\right)}$	Allocation of the purchase price based on the percentage of total$\left(\begin{array}{l}\$2,600,000\times \text{Specific asset's}\\ \text{ percentage of total}\end{array}\right)$
Land	1,736,000	$\frac{\$1,736,000}{\$2,800,000}$ =62%	1,612,000
Building 2	644,000	$\frac{\$644,000}{\$2,800,000}$=23%	598,000
Land Improvements 1	420,000	$\frac{\$420,000}{\$2,800,000}$=15%	390,000
Total	$2,80,000		$2,600,000

Table (2)

2.

To determine

Prepare a single journal entry to record all the incurred costs.

Explanation of Solution

Depreciation expense:

Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolescence.

Prepare journal entry to record the purchase as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 1, 2015	Land	2,115,800
	Land improvements 1	390,000
	Land Improvements 2	164,000
	Building 2	598,000
	Building 3	2,202,000
	Cash		5,469,800
	(To record the costs of lump-sum purchase)

Table (3)

• Land is an asset account and it is increased. Therefore, debit land account.
• Land Improvements are the asset account and they are increased. Therefore, debit land improvements account.
• Building is an asset account and it is increased. Therefore debit building account.
• Cash is an asset account and it is decreased. Therefore credit cash account.

3.

To determine

Prepare the December 31 adjusting entries to record depreciation of the assets for the year 2015.

Explanation of Solution

Prepare the December 31 adjusting entries to record depreciation of the assets for the year 2015 as follows:

Adjusting entry to record the depreciation of Building 2 for the year 2015:

Date	Account title and Explanation	Post Ref.	Debit (In $)	Credit (In $)
December 31, 2015	Depreciation expense		26,900
	Accumulated depreciation			26,900
	(To record the depreciation expense)

Table (4)

Working Note:

Calculate the depreciation expense.

$\begin{array}{c}\text{Depreciation = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}\\ =\frac{\$598,000-\$60,000}{20\text{years}}\\ =\$26,900\end{array}$

• Depreciation expense is a component of retained earnings. It decreases the retained earnings. Thus, depreciation expense is debited.
• Accumulated depreciation is a contra asset which decreases the value of the asset. Increase in accumulated depreciation decreases the asset’s value. Thus, accumulated depreciation on equipment is credited.

Adjusting entry to record the depreciation of Building 3 for the year 2015:

Date	Account title and Explanation	Post Ref.	Debit (In $)	Credit (In $)
December 31, 2015	Depreciation expense		72,400
	Accumulated depreciation			72,400
	(To record the depreciation expense)

Table (5)

Working Note:

Calculate the depreciation expense.

$\begin{array}{c}\text{Depreciation = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}\\ =\frac{\$2,202,000-\$392,000}{25\text{years}}\\ =\$72,400\end{array}$

• Depreciation expense is a component of retained earnings. It decreases the retained earnings. Thus, depreciation expense is debited.
• Accumulated depreciation is a contra asset which decreases the value of the asset. Increase in accumulated depreciation decreases the asset’s value. Thus, accumulated depreciation on equipment is credited.

Adjusting entry to record the depreciation of Land Improvements 1 for the year 2015:

Date	Account title and Explanation	Post Ref.	Debit (In $)	Credit (In $)
December 31, 2015	Depreciation expense		32,500
	Accumulated depreciation			32,500
	(To record the depreciation expense)

Table (6)

Working Note:

Calculate the depreciation expense.

$\begin{array}{c}\text{Depreciation = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}\\ =\frac{\$390,000-\$0}{12\text{years}}\\ =\$32,500\end{array}$

• Depreciation expense is a component of retained earnings. It decreases the retained earnings. Thus, depreciation expense is debited.
• Accumulated depreciation is a contra asset which decreases the value of the asset. Increase in accumulated depreciation decreases the asset’s value. Thus, accumulated depreciation on equipment is credited.

Adjusting entry to record the depreciation of Land Improvements 2 for the year 2015:

Date	Account title and Explanation	Post Ref.	Debit (In $)	Credit (In $)
December 31, 2015	Depreciation expense		8,200
	Accumulated depreciation			8,200
	(To record the depreciation expense)

Table (7)

Working Note:

Calculate the depreciation expense.

$\begin{array}{c}\text{Depreciation = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}\\ =\frac{\$164,000-\$0}{20\text{years}}\\ =\$8,200\end{array}$

• Depreciation expense is a component of retained earnings. It decreases the retained earnings. Thus, depreciation expense is debited.
• Accumulated depreciation is a contra asset which decreases the value of the asset. Increase in accumulated depreciation decreases the asset’s value. Thus, accumulated depreciation on equipment is credited.