Chapter 9, Problem 2BP

a.

To determine

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

Answer to Problem 2BP

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	$384,000	16%$\left(\frac{\$384,000}{\$2,400,000}\times 100\right)$	$352,000 $\left(\$2,200,000\times 16\%\right)$
Building	$912,000	38%$\left(\frac{\$912,000}{\$2,400,000}\times 100\right)$	$836,000$\left(\$2,200,000\times 38\%\right)$
Equipment	$960,000	40%$\left(\frac{\$960,000}{\$2,400,000}\times 100\right)$	$880,000$\left(\$2,200,000\times 40\%\right)$
Trucks	$144,000	6%$\left(\frac{\$144,000}{\$2,400,000}\times 100\right)$	$132,000 $\left(\$2,200,000\times 6\%\right)$
Totals	$2,400,000	100%	$2,200,000

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.

$\begin{array}{c}\text{Total purchase price}=\text{Purchase price + Consultant fees}\\ =\$2,180,000+\$20,000\\ =\$2,200,000\end{array}$ (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+)		2,180,000
	Cash (A–)			2,180,000
	(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 $2,180,000.
• Cash is an asset and the value of cash is decreased. Therefore, credit the Cash account by $2,180,000.
• Prepare journal entry to record the payment to the consultant.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 1	Consultant fees (E–)		20,000
	Cash (A–)			20,000
	(To record payment to the consultant)

Table (3)

Description:

• A consultant fee is an expense account and it is increased by $20,000. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit consultant fees account by $20,000.
• Cash is an asset and the value of cash is decreased. Therefore, credit Cash account by $20,000.

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)		37,500
	Accumulated Depreciation – Building (A–)			37,500
	(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 $37,500.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $37,500.

Working note:

Calculate depreciation expense for building using straight-line method.

$\begin{array}{c}\text{ Depreciation expense for 9 months}=\frac{\text{Acquisition cost – Salvage value}}{\text{Useful life}}\\ =\frac{\text{\$836,000}\text{–}\text{\$86,000}}{\text{15 years}}\times \frac{9}{12}\\ =\$37,500\end{array}$ (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)		39,600
	Accumulated Depreciation – Trucks (A–)			39,600
	(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 $39,600.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $39,600.

Working note:

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

$\begin{array}{c}\text{Depreciation rate = }\frac{\text{100\%}}{\text{5 years}}\text{ × 2}\\ \text{= 40\%}\end{array}$ (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:

$\begin{array}{c}\text{Depreciation expense for 9 months}=\text{Beginning book value × Depreciation rate}\\ =\$132,000\times \frac{40(3)}{100}\times \frac{9}{12}\\ =\$39,600\end{array}$ (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)		$67,500
	Accumulated Depreciation – Equipment (A–)			$67,500
	(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 $67,500.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $67,500.

Working note:

Calculate depreciation expense for building using straight-line method.

$\begin{array}{c}\text{ Depreciation expense for 9 months}=\frac{\text{Acquisition cost – Salvage value}}{\text{Useful life}}\\ \text{= }\frac{\text{\$880,000}\text{–}\text{\$70,000}}{\text{9 years}}\times \frac{9}{12}\\ \text{=}\text{\$67,500}\end{array}$ (5)