Q9-1TI - Horngren'S Financial And Managerial Accounting

Question

Budget Banners pays \(200,000 cash for a group purchase of land, building, and equipment. At the time of acquisition, the land has a market value of \)22,000, the building \(187,000, and the equipment \)11,000. Journalize the lump-sum purchase.

Step-by-Step Solution

Answer

Answer 

The land is assigned the cost of $20,000, the building is $170,000, and the equipment is $10,000.

Step 1: Meaning of Lump-Sum Purchase

Lump-Sum Purchase refers to when a company purchases many assets like land, building, and equipment by paying only a single price. Lump-sum purchase is also known as a Basket Purchase.

Step 2: Showing journal entry

Date	Accounts	Debit ($)	Credit ($)
	Land	20,000
	Building	170,000
	Equipment	10,000
	Cash		200,000

working notes:

 Calculation of total market value

$$\begin{gathered} \mathrm{Percentage} \mathrm{of} \mathrm{total} \mathrm{value}=\frac{\mathrm{Land} \mathrm{market} \mathrm{value}}{\mathrm{Total} \mathrm{market} \mathrm{value}} \\ =\frac{\$22,000}{\$220,000} \\ =10\% \end{gathered}$$
$$\begin{gathered} \mathrm{Percentage} \mathrm{of} \mathrm{total} \mathrm{value}=\frac{\mathrm{Building} \mathrm{market} \mathrm{value}}{\mathrm{Total} \mathrm{market} \mathrm{value}} \\ =\frac{\$18,7000}{\$220,000} \\ =85\% \end{gathered}$$

$$\begin{gathered} \mathrm{Percentage} \mathrm{of} \mathrm{total} \mathrm{value}=\frac{\mathrm{Equipment} \mathrm{market} \mathrm{value}}{\mathrm{Total} \mathrm{market} \mathrm{value}} \\ =\frac{\$11,000}{\$220,000} \\ =5\% \end{gathered}$$ 

Calculation of percentage of total value 

  Calculation showing the assigned cost to each asset

Asset	Market value
Land	$22,000
Building	187,000
Equipment	11,000
Total	$220,000	100%               $200,000