Question

Rodriguez Company pays $375,280 for real estate plus $20,100 in closing costs. The real estate consists of land appraised at $157,040; land improvements appraised at $58,890; and a building appraised at $176,670. Required: 1. Allocate the total cost among the three purchased assets. 2. Prepare the journal entry to record the purchase.

Answer 1

Answer:

Land = $158,152

Land improvements = $59,307

Building = $177,921

Total = $395,380

Explanation:

Price paid = 375,280 + 20,100 =395,380

To Allocate we use the market values of the assets and make them their standalone prices

Land               = 157,040

improvements= 58,890

Building          = 176,670

Total                =392,600

then we use the standalone prices as ratios

Land =  395,380 * 157,040/392,600 =158,152

Improvements = 395,380 *58,890/392,600 =59,307

Building  = 395,380 * 176,670/392,600 = 177,921

Answer 2

Answer:

Land, Improvements and Building are assigned $158,152, $59,307, and $177,921

Entries required are;

Debit Land account    $158,152

Debit Improvements     $59,307

Debit Building accounts  $177,921

Credit Cash account        $395,380

Explanation:

The total cost of an asset is includes the cost of the item itself and other associated cost incurred in getting the asset to a place and state where the asset becomes available for use.

The actual cost incurred for the asset will be apportioned to the individual asset in proportion to their appraised values.

Total cost of asset = $375,280 + $20,100

= $395,380

Total appraised cost

= $157,040 + $58,890 + $176,670

= $392,600

Land cost

= ($157,040/$392,600) * $395,380

= $158,152

Improvements

= ($58,890/$392,600) * $395,380

= $59,307

Building

= ($176,670/$392,600) * $395,380

= $177,921

Entries required

Debit Land account    $158,152

Debit Improvements     $59,307

Debit Building accounts  $177,921

Credit Cash account        $395,380

Being entries to recognize the cost of the real estate.