Question

Lump-Sum Purchase To add to his growing chain of grocery stores, on January 1, 2017, Danny Marks bought a grocery store of a small competitor for $608,000. An appraiser, hired to assess the acquired assets' values, determined that the land, building, and equipment had market values of $223,740,$169,500, and $284,760, respectively. Required: 1. What is the acquisition cost of each asset? Do not round intermediate calculations. If required, round your final answers to the nearest dollar. Identifv and analvze the effect of the acouisition. How does this entry affect the accounting equation? If a financial statement item is not affected, select 'No Entry' and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. 2. Danny plans to deprecate the operating assets on a straight-line basis for 20 years. Determine the amount of depredation expense for 2017 on these newly acquired assets. Assume zero residual value for all assets. Round your answers to the nearest whole dollar. If an amount is zero, enter " 0 ". 3. How would the assets appear on the balance sheet as of December 31,2017 ?

Answer 1

Danny Marks' allocated acquisition costs are roughly $203,454 for land, $151,980 for the building, and $252,566 for equipment. The total depreciation expense for 2017 is $20,227. By the end of 2017, the balance sheet will show the assets as land at $203,454, building at $144,381, and equipment at $239,938.

Step-by-step explanation:

Acquisition Cost of Assets

To calculate the acquisition cost of each asset purchased by Danny Marks, we allocate the lump-sum purchase price to the individual assets based on their market values. Here are the calculations:

• 
  
• Total Market Value = Land ($223,740) + Building ($169,500) + Equipment ($284,760) = $677,000
• 
  
• Land Proportion = Land Market Value / Total Market Value = $223,740 / $677,000
• 
  
• Building Proportion = Building Market Value / Total Market Value = $169,500 / $677,000
• 
  
• Equipment Proportion = Equipment Market Value / Total Market Value = $284,760 / $677,000

The acquisition costs (rounded to the nearest dollar) are:

• 
  
• Land: $608,000 × Land Proportion ≈ $203,454
• 
  
• Building: $608,000 × Building Proportion ≈ $151,980
• 
  
• Equipment: $608,000 × Equipment Proportion ≈ $252,566

Depreciation Expense for 2017

Using the straight-line depreciation method with no residual value over 20 years:

• 
  
• Annual Depreciation for Building = Building Acquisition Cost / Useful Life = $151,980 / 20 = $7,599
• 
  
• Annual Depreciation for Equipment = Equipment Acquisition Cost / Useful Life = $252,566 / 20 = $12,628
• 
  
• Total Depreciation Expense for 2017 = Building Depreciation + Equipment Depreciation = $7,599 + $12,628 = $20,227

Balance Sheet Presentation as of December 31, 2017

The balance sheet would show the assets at their acquisition cost minus one year's worth of depreciation:

• 
  
• Land: $203,454 (no depreciation)
• 
  
• Building: $151,980 - $7,599 = $144,381
• 
  
• Equipment: $252,566 - $12,628 = $239,938

The accounting equation is affected as follows: assets increase by the acquisition cost, and equity increases by the amount of the purchase if it was paid in cash from retained earnings. If financed, liabilities increase by the amount of any loan taken out to finance the purchase.