Q18E - Horngren'S Financial And Managerial Accounting

Question

Making a lump-sum purchase of assets Maplewood Properties bought three lots in a subdivision for a lump-sum price. An independent appraiser valued the lots as follows:

Lot	Appraised Value
1	\(144,000
2	96,000
3	240,000

 

Maplewood paid \)355,000 in cash. Record the purchase in the journal, identifying each lot’s cost in a separate Land account. Round decimals to two places, and use the computed percentages throughout.

Step-by-Step Solution

Answer

 Cash payment is allotted in ratio 0.3:0.2:0.5 respectively to lot 1:2:3.

Step 1: Meaning of Lump-Sum

A lump-sum purchase involves paying a single price for multiple assets. The cost of each asset purchased must be identified based on the relative-market-value method.

Step 2: Journal entry for lump-sum purchase

Date	Particulars	Debit ($)	Credit ($)
	Land Lot 1	106,500
	Land Lot 2	71,000
	Land Lot 3	177,500
	Cash		355,000
	(Being cash paid for 3 Lots)

Working note:

Lot	Appraisal Fair Value
1	$ 144,000
2	$ 96,000
3	$ 240,000
Total Appraisal Fair Value	$ 480,000

Lot 1: 

$\begin{array}{c}\mathrm{Appraisal} \mathrm{ratio}-\mathrm{Lot}1=\frac{\mathrm{Appraised} \mathrm{value} \mathrm{of} \mathrm{lot}1}{\mathrm{Total} \mathrm{appraised} \mathrm{value}}\\ =\frac{\mathrm{\$}144,000}{\mathrm{\$}480,000}\\ =0.3\end{array}$

Lot 2:

 

$\begin{array}{c}\mathrm{Appraisal} \mathrm{ratio}-\mathrm{Lot}2=\frac{\mathrm{Appraised} \mathrm{value} \mathrm{of} \mathrm{lot}1}{\mathrm{Total} \mathrm{appraised} \mathrm{value}}\\ =\frac{\mathrm{\$}96,000}{\mathrm{\$}480,000}\\ =0.2\end{array}$

Lot 3:

 

$\begin{array}{c}\mathrm{Appraisal} \mathrm{ratio}-\mathrm{Lot}3=\frac{\mathrm{Appraised} \mathrm{value} \mathrm{of} \mathrm{lot}3}{\mathrm{Total} \mathrm{appraised} \mathrm{value}}\\ =\frac{\mathrm{\$}240,000}{\mathrm{\$}480,000}\\ =0.5\end{array}$

Allocation of cost to each lot:

Lot	Cash paid	X	Ratio	=	Allocated cost ($)
1	$355,000	X	0.3	=	$106,500
2	$355,000	X	0.2	=	71,000
3	$355,000	X	0.5	=	177,500
					$355,000