Question

Red Rock Bakery purchases land, building, and equipment for a single purchase price of $580,000. However, the estimated fair values of the land, building, and equipment are $204,000, $408,000, and $68,000, respectively, for a total estimated fair value of $680,000. Required: Determine the amounts Red Rock should record in the separate accounts for the land, the building, and the equipment.

Answer 1

Answer:

Land ($174,000), building ($348,000) and equipment ($58,000)

Explanation:

This is a case of a basket purchase. Basket purchase is usually a purchase of a group of asset. This purchase usually comes with a reduced price when compared to the individual asset's market value. Therefore, the cost of each asset would be allocated based on the individual's asset proportionate market value

Asset        Estimated Fair Value    Percentage           Allocated Cost

  (a)                        (b)                   (c) = (b)/(d)*100     (e) = (c) * $580,000            

Land                   $204,000                30%                           $174,000

Building              $408,000                60%                          $348,000

Equipment            $68,000                10%                             $58,000

Total (d)              $680,000                                                 $580,000