Question

Red Rock Bakery purchases land, building, and equipment for a single purchase price of $600,000. However, the estimated fair values of the land, building, and equipment are $175,000, $455,000, and $70,000, respectively, for a total estimated fair value of $700,000.
Required:
Determine the amounts Red Rock should record in the separate accounts for the land, the building, and the equipment.

Answer 1

Answer:

The amount to be recorded for the land, building, and equipment are $150,000, $390,000, and $60,000, respectively,

Explanation:

The cost of an asset is the total cost incurred in making the assets available for use. Assets are usually recognized at historical cost. The fair value of assets may be used as a basis for the apportionment of cost to each of the assets.

This means that the higher the fair value, the higher the actual cost to be apportioned to the asset.

Given that total fair value is $700,000 and amount paid is $600,000

Recorded amount for;

Land

= ($175,000/$700,000) × $600,000

= $150,000

Building

= ($455,000/$700,000) × $600,000

= $390,000

Equipment

= ($70,000/$700,000) × $600,000

= $60,000