Question

Rodriguez Company pays $384,345 for real estate with land, land improvements, and a building Land is appraised at $198.000, land improvements are appraised at $44,000; and the building is appraised at $198,000. 1. Allocate the total cost among the three assets. 2. Prepare the journal entry to record the purchase. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Allocate the total cost among the three assets.

Answer 1

To allocate the total cost among the three assets, we need to use the relative fair market values of each asset.

The total fair market value of all assets is:

$198,000 (land) + $44,000 (land improvements) + $198,000 (building) = $440,000

So, we can calculate the percentage of the total fair market value that each asset represents:

Land: $198,000 / $440,000 = 0.45 (45%)
Land improvements: $44,000 / $440,000 = 0.10 (10%)
Building: $198,000 / $440,000 = 0.45 (45%)

Finally, we can allocate the total cost of $384,345 to each asset by multiplying the total cost by the percentage of the total fair market value that each asset represents:

Land: $384,345 x 0.45 = $172,955.25
Land improvements: $384,345 x 0.10 = $38,434.50
Building: $384,345 x 0.45 = $172,955.25

Therefore, the allocated cost for each asset is as follows:

- Land: $172,955.25
- Land improvements: $38,434.50
- Building: $172,955.25

To record the purchase in the journal, we would use the following entry:

Debit Real Estate with land: $172,955.25
Debit Land Improvements: $38,434.50
Debit Building: $172,955.25
Credit Cash or Bank Account: $384,345.00

This entry reflects the allocation of the total cost to the three assets and the reduction of cash or bank account by the total cost of the purchase.