Plant asset costs;
Timberly Construction makes a lump-sum purchase of several assets on January 1 at a total cash price of $900,000. The estimated market values of the purchased assets are building, $508,800; land, $297,600; land improvements, $28,800; and four vehicles, $124,800.
Required
- Allocate the lump-sum purchase price to the separate assets purchased. Prepare the
journal entry to record the purchase. - Compute the first-year depreciation expense on the building using the straight-line method, assuming a 15-year life and a $27,000 salvage value.
Check (2) $30,000 - Compute the first-year depreciation expense on the land improvements assuming a five-year life and double-declining-balance depreciation.
(3) $10,800
Analysis Component
- Compared to straight-line depreciation, does accelerated depreciation result in payment of less total taxes over the asset’s life?
Lump Sum Purchase:
When the assets are purchased or bought in a lot in one transaction at a lump sum price that is called lump sum purchase. In lump sum purchase, apportion cost of purchase on the basis of relative market value can be anticipated by appraisal.
Plant Assets:
Plant assets are assets which are tangible in nature and are used in a company’s operations that have a useful life of more than 1 accounting period. Plant assets are also called as plant and equipment assets. They include all the normal cost and reasonable expenditures that are spent to put that particular plant asset to use.
Journal Entries:
It means recording of financial data related to business transactions in a journal in a manner so that debit equals credit. They provide an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health
Accounting rules for journal entries:
- To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
- To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.
Depreciation:
Depreciation is the amount of decrease in the value of an asset within a set time period due to wear and tear of that particular asset. It helps in readjusting the actual cost of the particular asset o which the depreciation is applied.
Double Declining Balance Method:
It is a method of depreciation in which the rate of depreciation is double the rate of straight line method of depreciation. The amount of depreciation applied to the asset declines every period because book value declines every period.
1.
To prepare: A table to compute the lump sum purchase and to prepare journal entry.
Explanation of Solution
Computation of lump sum purchase:
Particulars | Appraised Value($) | Percentage of total | Apportioned Cost($) |
Building | 508,800 | 53% | 477,000 |
Land improvements | $28,800 | 3% | 27,000 |
Land | 297,600 | 31% | 279,000 |
Vehicles | 124,800 | 13% | 117,000 |
Total | 960,000 | 900,000 |
Table (1)
Record purchase of the assets on January 1st 2017.
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Jan1 | Building | 477,000 | ||
Land | 117,000 | |||
Vehicles | 279,000 | |||
Land improvements | 27,000 | |||
Cash | 900,000 | |||
(To record the purchase of assets) |
Table (2)
- Building is an asset account. Building account increases as the a new building has been purchased, hence all the assets are debited as they increases in value.
- Land is an asset account. Land account increases as a new land is purchased and all the assets are debited as a new asset is purchased or if its value increases.
- Vehicle account is an asset account. Vehicles account increases as a new vehicle is purchased and all the assets are debited as a new asset is purchased or if its value increases.
- Land improvements are an asset account. Land improvement account increases as some improvements have been done on land to increase its useful life and all the assets are debited as their value increases.
- Cash account is an asset account. Cash account decreases as the amount paid for the purchase of all assets are made in cash and all the assets are credited as their values decreases.
Working Notes:
Total purchase price is $900,000.
Estimated market value of building is $508,800.
Estimated market value of land is $297,600
Estimated market value of vehicles is $124,800.
Estimated market value of land improvements is $28,800.
Computation of total appraised value:
Total appraised value is $960,000.
Building
Computation of percentage of total of building:
Percentage of building is 53%.
Computation of apportioned cost of the building:
Apportioned Cost of the building is $477,000.
Land improvements
Computation of Percentage of total of Land improvements:
Percentage of land improvements is 3%.
Computation of apportioned cost of the land improvements:
Apportioned cost of land improvements is $27,000.
Land
Computation of Percentage of total of Land:
Percentage of Land is 31%.
Computation of Apportioned Cost of the Land:
Apportioned cost of land is $279,000.
Vehicles
Computation of percentage of total of vehicles:
Percentage of vehicles is 135.
Computation of apportioned cost of the vehicles:
Apportioned cost of vehicles is $117,000.
2.
To compute: The depreciation amount on building using straight line depreciation method.
Explanation of Solution
Given,
Cost of building is $477,000.
Salvage value is $27,000.
Useful life is 15 years.
Formula to calculate depreciation:
Substitute $477,000 as the cost of the asset, $27,000 as residual value and 15 years as useful life,
Depreciation on building is $30,000.
Hence, the depreciation that will be charged on building for the year 2017 is $30,000.
3.
To compute: The depreciation amount on the land improvements using double declining method.
Explanation of Solution
Given,
Appraised value of land improvements is 27,000.
Useful life is 5 years.
Formula to calculate depreciation in first year:
Substitute $27,000 as cost of the land improvements (given) and 40% as depreciation rate (working note) in the above formula,
Working Note:
Formula to calculate the depreciation rate:
The double depreciation rate is 40%.
Hence, the depreciation that will be charged is $10,800.
4.
To identify: Accelerated depreciation results in payment of fewer taxes.
Explanation of Solution
- This statement is not correct that accelerated depreciation reduces that amount of tax rate paid to the government, it doesn’t reduce the taxes as it just provides higher amount of depreciation in the first few years and provides lower depreciation in the later years.
- The Acceleration depreciation just delays the taxes to the forthcoming years.
Hence, the accelerated depreciation does not result in payment of less tax.
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Chapter 8 Solutions
FINANCIAL ACCOUNTING FUNDAMENTALS
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