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Chapter 9: Q2SE (page 526)

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.

Short Answer

Expert verified

Cash payment is allocated as:

Land

$105,000

Building

$84,000

Equipment

$21,000

Step by step solution

01

Definition of Lump-sum Purchase

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

02

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

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