1.
Prepare a table to allocate the costs incurred by Company M.
1.
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)
Note: Refer table-2 for the purchase price of each asset.
Working note:
Prepare a table to allocate the costs incurred by Company M as follows:
Assets | Fair Market Value (in $) | Percent of total= | Allocation of the purchase price based on the percentage of total |
Land | 1,736,000 | 1,612,000 | |
Building 2 | 644,000 | 598,000 | |
Land Improvements 1 | 420,000 | 390,000 | |
Total | $2,80,000 | $2,600,000 |
Table (2)
…… (1)
2.
Prepare a single
2.
Explanation of Solution
Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolescence.
Prepare a single journal entry to record all the incurred costs as follows:
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
January 1 | Land | 2,115,800 | |
Land improvements 1 | 390,000 | ||
Land Improvements 2 | 164,000 | ||
Building 2 | 598,000 | ||
Building 3 | 2,202,000 | ||
Cash | 5,469,800 | ||
(To record the costs of lump-sum purchase) |
Table (2)
- Land is an asset account and it is increased. Therefore, debit land account.
- Land Improvements are the asset account and they are increased. Therefore, debit land improvements account.
- Building is an asset account and it is increased. Therefore debit building account.
- Cash is an asset account and it is decreased. Therefore credit cash account.
3.
Prepare the December 31
3.
Explanation of Solution
Prepare the December 31 adjusting entries to record depreciation of the assets for the first year as follows:
Building 2:
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31 | Depreciation expense (2) | 26,900 | ||
| 26,900 | |||
(To record the depreciation expense) |
Table (3)
- Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $26,900.
- Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit the accumulated depreciation by $26,900.
Working Note:
Calculate the depreciation expense.
Building 3:
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31 | Depreciation expense (3) | 72,400 | ||
Accumulated depreciation | 72,400 | |||
(To record the depreciation expense) |
Table (4)
- Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $72,400.
- Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit the accumulated depreciation by $72,400.
Working Note:
Calculate the depreciation expense.
Land Improvements 1:
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31 | Depreciation expense (4) | 32,500 | ||
Accumulated depreciation | 32,500 | |||
(To record the depreciation expense) |
Table (5)
- Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $32,500.
- Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit the accumulated depreciation by $32,500.
Working Note:
Calculate the depreciation expense.
Land Improvements 2:
Date | Account title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
December 31 | Depreciation expense (5) | 8,200 | ||
Accumulated depreciation | 8,200 | |||
(To record the depreciation expense) |
Table (6)
- Depreciation expense is an expense account, and it decreases the value of equity. Hence, debit the depreciation expense by $8,200.
- Accumulated depreciation is a contra asset, and it decreases the value of assets. Therefore, credit the accumulated depreciation by $8,200.
Working Note:
Calculate the depreciation expense.
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