Chapter 9, Problem 2AP

a.

To determine

Calculate the amounts allocated to the various types of plant assets acquired by Company S on July 1.

Answer to Problem 2AP

Calculate the amounts allocated to the various types of plant assets acquired by Company S on July 1 as follows.

Asset	Appraised value	Percentage of total	Allocation of purchase price
Land	$120,000	15%$\left(\frac{\$120,000}{\$800,000}\times 100\right)$	$114,750 $\left(\$765,000(1)\times 15\%\right)$
Building	$440,000	55%$\left(\frac{\$440,000}{\$800,000}\times 100\right)$	$420,750$\left(\$765,000\times 55\%\right)$
Trucks	$144,000	18%$\left(\frac{\$144,000}{\$800,000}\times 100\right)$	$137,700$\left(\$765,000\times 18\%\right)$
Equipment	$96,000	12%$\left(\frac{\$96,000}{\$800,000}\times 100\right)$	$91,800 $\left(\$765,000\times 12\%\right)$
Totals	$800,000	100%	$765,000

Table (1)

Explanation of Solution

Basket Purchase:

For maintaining one purchase price, a company buys a group of assets at the same time and pays a lump sum amount; it is referred to as basket purchase.

Working note:

Calculate the total purchase price.

$\begin{array}{c}\text{Total purchase price}=\text{Purchase price + Consultant fees}\\ =\$760,000+\$5,000\\ =\$765,000\end{array}$ (1)

b.

To determine

Prepare journal entry for July 1 to record the purchase of the assets and the payments to the consultant.

Explanation of Solution

• Prepare journal entry to record the purchase of the assets.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 1	Plant Assets (A+)		760,000
	Cash (A–)			760,000
	(To record the purchase of assets)

Table (2)

Description:

• A plant asset is an assets and its value is increased. Therefore, debit the plant assets account by $760,000.
• Cash is an asset and the value of cash is decreased. Therefore, credit the Cash account by $760,000.
• Prepare journal entry to record the payment to the consultant.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 1	Consultant fees (E–)		5,000
	Cash (A–)			5,000
	(To record payment to the consultant)

Table (3)

Description:

• A consultant fee is an expense account and it is increased by $5,000. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit consultant fees account by $5,000.
• Cash is an asset and the value of cash is decreased. Therefore, credit Cash account by $5,000.

c.

To determine

Prepare journal entry for December 31 to record the depreciation expense for the year on the building, trucks and equipment.

Explanation of Solution

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method.

Units-of-production method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is based on the production capacity or output is referred to as units-of-production method.

• Prepare journal entry to record the depreciation expense for the year on the building:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Depreciation Expense (E–) (2)		9,469
	Accumulated Depreciation – Building (A–)			9,469
	(To record depreciation expense)

Table (4)

Description:

• Depreciation Expense is an expense account. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit Depreciation Expense account with $9,469.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $9,469.

Working note:

Calculate depreciation expense for building using straight-line method.

$\begin{array}{c}\text{Annual Depreciation expense = }\frac{\text{Acquisition cost – Salvage value}}{\text{Useful life}}\\ \text{= }\frac{\text{\$420,750}\text{–}\text{\$42,000}}{\text{20 years}}\\ \text{=}\text{\$18,938}\end{array}$

Depreciation for 6 months (from July 1 to December 31) = $9,469$\left(\frac{\$18,938}{2}\right)$ (2)

• Prepare journal entry to record depreciation expense for the year on the trucks.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Depreciation Expense (E–) (4)		34,425
	Accumulated Depreciation – Trucks (A–)			34,425
	(To record depreciation expense)

Table (5)

Description:

• Depreciation Expense is an expense account. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit Depreciation Expense account with $34,425.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $34,425.

Working note:

Compute the depreciation rate applied each year using double decline method:

$\begin{array}{c}\text{Depreciation rate = }\frac{\text{100\%}}{\text{4 years}}\text{ × 2}\\ \text{= 50\%}\end{array}$ (3)

Note: Use 100% to represent depreciation in percentage. Multiply the depreciation rate with 2 as it is a double-declining method. 

Compute the amount charged for depreciation in the first year:

$\begin{array}{c}\text{Depreciation}=\text{Beginning book value × Depreciation rate}\\ =\$137,700\times \frac{50(3)}{100}\\ =\$68,850\end{array}$

Depreciation for 6 months (from July 1 to December 31) = $34,425$\left(\frac{\$68,850}{2}\right)$ (4)

• Prepare journal entry to record depreciation expense for the year on the equipment.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31	Depreciation Expense (E–) (5)		$5,113
	Accumulated Depreciation – Equipment (A–)			$5,113
	(To record depreciation expense)

Table (6)

Description:

• Depreciation Expense is an expense account. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit Depreciation Expense account with $5,113.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $5,113.

Working note:

Calculate depreciation expense for building using straight-line method.

$\begin{array}{c}\text{Annual Depreciation expense}=\frac{\text{Acquisition cost – Salvage value}}{\text{Useful life}}\\ \text{= }\frac{\text{\$91,800}\text{–}\text{\$10,000}}{\text{8 years}}\\ =\$10,225\end{array}$

Depreciation for 6 months (from July 1 to December 31) = $5,113$\left(\frac{\$10,225}{2}\right)$ (5)