Timberly Construction negotiates a lump-sum purchase of several assets from a company that is going out of business. The purchase is completed on January 1, 2013, at a total cash price of $820,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, $487,550; land, $308,450; land improvements, $59,700; and four vehicles, $139,300. The company’s fiscal year ends on December 31.
1. Prepare the journal entry to record the cost of the lump-sum purchase.
2. Compute the depreciation expense for year 2013 on the building using the straight-line method, assuming a 15-year life and a $30,000 salvage value.
3. Compute the depreciation expense for year 2013 on the land improvements assuming a five-year life and double-declining-balance depreciation.
Here is some other information I forgot to include (well, not really information, but part of the problem that I'd already solved):
Total Appraised Value = $995,000
Total Apportioned Cost = $820,000
To answer these questions, we need to understand the concepts of journal entries, straight-line method of depreciation, and double-declining-balance depreciation.
1. Journal entry to record the cost of the lump-sum purchase:
To record the lump-sum purchase, we need to debit the respective asset accounts and credit the cash account.
The journal entry would be as follows:
Date: January 1, 2013
Assets:
Building $487,550
Land $308,450
Land Improvements $59,700
Vehicles $139,300
Total $995,000
Cash $820,000
Gain on Purchase $175,000
In this case, since the total cash price is less than the total estimated market value, a gain of $175,000 is recognized on the purchase.
2. Computing depreciation expense for the building using the straight-line method:
The straight-line method of depreciation evenly allocates the cost of an asset over its useful life. The formula to compute depreciation expense per year is:
Depreciation Expense per Year = (Cost - Salvage Value) / Useful Life
Given that the cost of the building is $487,550, the salvage value is $30,000, and the useful life is 15 years, we can calculate the depreciation expense.
Depreciation Expense per Year = ($487,550 - $30,000) / 15
= $457,550 / 15
= $30,503.33 (rounded to the nearest whole dollar)
Therefore, the depreciation expense for the building in 2013 using the straight-line method is $30,503.33.
3. Computing depreciation expense for land improvements using double-declining-balance depreciation:
The double-declining-balance depreciation method is an accelerated depreciation method that assigns higher depreciation expenses in the early years of an asset's life. The formula to compute depreciation expense per year is:
Depreciation Expense per Year = (1 ÷ Useful Life) × Double-Declining Balance
Given that the useful life of land improvements is 5 years, we can calculate the depreciation expense.
Double-Declining Balance = 2 × (Cost - Accumulated Depreciation)
= 2 × ($59,700 - $0)
= 2 × $59,700
= $119,400
Depreciation Expense per Year = (1 ÷ 5) × $119,400
= $23,880
Therefore, the depreciation expense for the land improvements in 2013 using double-declining-balance depreciation is $23,880.
1. To record the cost of the lump-sum purchase, the following journal entry should be made:
Date: January 1, 2013
Debit: Building $487,550
Debit: Land $308,450
Debit: Land Improvements $59,700
Debit: Vehicles $139,300
Credit: Cash $820,000
The debit amounts represent the estimated market values of the assets, and the credit amount represents the cash paid for the purchase.
2. To compute the depreciation expense for year 2013 on the building using the straight-line method, follow these steps:
Step 1: Determine the depreciable cost of the building.
Depreciable cost = Cost of the building - Salvage value
Depreciable cost = $487,550 - $30,000 = $457,550
Step 2: Determine the annual depreciation expense.
Annual depreciation expense = Depreciable cost / Useful life
Annual depreciation expense = $457,550 / 15 years = $30,503.33
Therefore, the depreciation expense for year 2013 on the building using the straight-line method is $30,503.33.
3. To compute the depreciation expense for year 2013 on the land improvements using the double-declining-balance depreciation method with a five-year life, follow these steps:
Step 1: Determine the initial book value of the land improvements.
Initial book value = Cost of the land improvements
Initial book value = $59,700
Step 2: Determine the depreciation rate.
Depreciation rate = (2 / Useful life) * 100
Depreciation rate = (2 / 5 years) * 100 = 40%
Step 3: Determine the depreciation expense for year 2013.
Depreciation expense = Initial book value * Depreciation rate
Depreciation expense = $59,700 * 40% = $23,880
Therefore, the depreciation expense for year 2013 on the land improvements using the double-declining-balance method is $23,880.