Question

S7-2 (similar to) Foley Distribution Service pays $ 290 comma 000 for a group purchase of​ land, building, and equipment. At the time of​ acquisition, the land has a current market value of $ 64 comma 000​, the​ building's current market value is $ 208 comma 000​, and the​ equipment's current market value is $ 48 comma 000. Prepare a schedule allocating the purchase price of $ 290 comma 000 to each of the individual assets purchased based on their relative market​ values, then journalize the​ lump-sum purchase of the three assets. The business signs a note payable for the purchase price.

Answer 1

Answer:

Asset             Allocated cost

Land                   $58,000

Building             $188,500

Equipment         $43,500

Debit Assets  $290,000

Credit Note payable  $290,000

Being entries to recognize the purchase of assets by note payable.

Explanation:

The cost of each asset (land, building, and equipment) will be allocated to them based on the market value. The higher the market value, the higher the cost apportioned to each asset from the single amount paid for all the assets.

Given that the market values are in the ratio of

64,000:208,000:48,000 for land, building and equipment respectively. This is equivalent to ratios 4:13:3.

Hence, where the total amount paid is $290,000, cost apportionment

Land

= 4/20 × $290,000

= $58,000

Building

= 13/20 × $290,000

= $188,500

Equipment

= 3/20 × $290,000

= $43,500

When an asset is purchased with a note payable signed, the asset is debited and the note payable is credited.