Q2SE - Horngren'S Financial And Managerial Accounting

Question

Making a lump-sum asset purchase

Concord Pet Care Clinic paid \(210,000 for a group purchase of land, building, and equipment. At the time of the acquisition, the land had a market value of \)110,000, the building \(88,000, and the equipment \)22,000. Journalize the lump-sum purchase of the three assets for a total cost of $210,000, the amount for which the business signed a note payable.

Step-by-Step Solution

Answer

Cash payment is allocated as:

Land	$105,000
Building	$84,000
Equipment	$21,000

Step 1: Definition of Lump-sum Purchase

Lump-sum purchase is when various assets like land, equipment, etc., are purchased together at a single price.

Step 2: Journal entry for recording the lump-sum purchase:

Date	Accounts and Explanation	Debit ($)	Credit ($)
	Land	105,000
	Building	84,000
	Equipment	21,000
	Cash		210,000
	(To record the lump-sum purchase of assets)

 

Working note:

Calculation of total market value:

Particular	Amount ($)
Land	$110,000
Building	88,000
Equipment	22,000
Total market value	$220,000

 

Calculation of allocation percentage:

Particular	Market value	/	Total market value	=	Allocation ratio
Land	$110,000	/	$220,000	=	0.5
Building	$88,000	/	$220,000	=	0.4
Equipment	$22,000	/	$220,000	=	0.1

 

Allocation of cash paid:

Particular	Total cash paid	X	Allocation ratio	=	Cash paid for asset
Land	$210,000	X	0.5	=	$105,000
Building	$210,000	X	0.4	=	$84,000
Equipment	$210,000	X	0.1	=	$21,000