Chapter 8, Problem 3E

To determine

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 one 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:

Journal entries are the entries that are made in the books of accounts to record every transaction that happens in the business in the chronological order.

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.

To prepare: Journal entry.

Explanation of Solution

Given,
Cost of real estate is $375,080.
Closing cost is $20,100.

Formula to calculate cost of purchase,

$\text{Cost}\text{of}\text{purchase}=\text{Cost}\text{of}\text{real}\text{estate}+\text{Closing}\text{cost}$

Substitute $375,080 for cost of real estate and $20,100 for closing cost in the above formula.

$\begin{array}{c}\text{Cost}\text{of}\text{purchase}=\$375,080+\$20,100\\ =\$395,180\end{array}$

Amount to be apportioned is $395,180.

Given,
Appraised value of the building is $157,040.
Appraised value of the land improvements is $58,890.
Appraised value of the land is $176,670.

Formula to calculate the total appraised value,

$\text{Total}\text{appraised}\text{value}=\left(\begin{array}{l}\text{Appraised}\text{value}\text{of}\text{the}\text{building}\\ +\text{Appraised}\text{value}\text{of}\text{the}\text{land}\text{improvements}\\ +\text{Appraised}\text{value}\text{of}\text{land}\end{array}\right)$

Substitute $157,040 for the appraised value of the building, $58,890 for appraised value of the land improvements and $176,670 for the appraised value of the land.

$\begin{array}{c}\text{Total}\text{Appraised}\text{value}=\$157,040+\$58,890+\$176,670\\ =\$392,600\end{array}$

The total appraised value is $392,600.

Building

Given,
Appraised value of the building is $157,040.

Formula to calculate percentage of the building out of total appraised value,

$\text{Percentage}\text{of}\text{total}=\frac{\text{Appraised}\text{value}\text{of}\text{building}}{\text{Total}\text{appraised}\text{value}}$

Substitute $157,040 for appraised value of the building and $392,600 for total appraised value.

$\begin{array}{c}\text{Percentage}\text{of}\text{total}=\frac{\$157,040}{\$392,600}\\ =0.40\\ =40\%\end{array}$

Percentage of building is 40%.

Compute apportioned cost.

Given,
Appraised value of the building is $157,040.

Formula to calculate apportioned cost,

$\text{Apportioned}\text{cost}=\text{Amount}\text{to}\text{be}\text{apportioned}\times \text{Percentage}\text{of}\text{building}$

Substitute $395,180 for Amount to be apportioned and 40% for percentage of building in the given formula.

$\begin{array}{c}\text{Apportioned}\text{cost}=\$395,180\times 40\%\\ =\$158,072\end{array}$

Apportioned cost of building is $158,072.

Land Improvements

Given,
Appraised value of the land improvements is $58,890.

Formula to calculate Percentage of the Land Improvements out of total appraised value,

$\text{Percentage}\text{of}\text{total}=\frac{\text{Appraised}\text{value}\text{of}\text{land}\text{improvements}}{\text{Total}\text{appraised}\text{value}}$

Substitute $58,890 for appraised value of the land improvements and $392,600 for total appraised value.

$\begin{array}{c}\text{Percentage}\text{of}\text{total}=\frac{\$58,890}{\$392,600}\\ =0.15\\ =15\%\end{array}$

Percentage of land improvements is 15%.

Compute apportioned cost.

Given,
Appraised value of the building is $157,040.

Formula to calculate apportioned cost,

$\text{Apportioned}\text{cost}=\left(\begin{array}{l}\text{Amount}\text{to}\text{be}\text{apportioned}\\ \times \text{Percentage}\text{of}\text{land}\text{improvements}\end{array}\right)$

Substitute $395,180 for Amount to be apportioned and 15% for percentage of land improvements.

$\begin{array}{c}\text{Apportioned}\text{cost}=\$395,180\times 15\%\\ =\$59,277\end{array}$

Apportioned cost of land improvement is $59,277.

Land

Given,
Appraised value of the land improvements is $176,670.

Formula to calculate percentage of the land out of total appraised value,

$\text{Percentage}\text{of}\text{land}=\frac{\text{Appraised}\text{value}\text{of}\text{land}}{\text{Total}\text{Appraised}\text{value}}$

Substitute $176,670 for the appraised value of land and $392,600 for total appraised value.

$\begin{array}{c}\text{Percentage}\text{of}\text{land}=\frac{\$176,670}{\$392,600}\\ =0.45\\ =45\%\end{array}$

Percentage of land is 45%.

Compute apportioned cost.

Given,
Appraised value of the building is $176,670.

Formula to calculate apportioned cost,

$\text{Apportioned}\text{cost}=\text{Amount}\text{to}\text{be}\text{apportioned}\times \text{Percentage}\text{of}\text{building}$

Substitute $395,180 for Amount to be apportioned and 45% for percentage of land.

$\begin{array}{c}\text{Apportioned}\text{cost}=\$395,180\times 45\%\\ =\$177,831\end{array}$

Apportioned cost of land is $177,831.

To record lump sum purchase.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Land		177,831
	Land improvement		59,277
	Buildings		158,072
	Cash			395,180
	(To record the appraised value of assets)

• Land is an asset account. Land account is increasing as the value of land has appraised and all the assets are debited when the value of assets increase this is the reason land is debited.
• Land improvements are an asset account. Land improvements account is increasing as the value of land has appraised and all the assets are debited when the value of assets increase this is the reason land improvements is debited.
• A building is an asset account. Building Land account is increasing as the value of land has appraised and all the assets are debited when the value of assets increase this is the reason building is debited.
• Cash is an asset account. Cash is decreasing as the payment is made to appraise the value of the assets and hence assets decreases that is the reason it is credited.