Question

Allocate costs in a basket purchase (LO7-1)

Red Rock Bakery purchases land, building, and equipment for a single purchase price of $460,000. However, the estimated fair values of the land, building, and equipment are $168,000, $308,000, and $84,000, respectively, for a total estimated fair value of $560,000.
Required:
Determine the amounts Red Rock should record in the separate accounts for the land, the building, and the equipment.

Answer 1

Red Rock Bakery

The amounts Red Rock should record in the separate accounts for the land, the building, and the equipment are:

Land = $121,800

Building = $223,300

Equipment = $60,900

Step-by-step explanation:

a) Data and Calculations:

Single purchase price for land, building, and equipment = $460,000

Estimated fair value of Land = $168,000

Estimated fair value of Building = $308,000

Estimated fair value of Equipment = $84,000

Total estimated fair values = $560,000

Amount to be recorded for each:

Land = $168,000/$560,000 * $406,000 = $121,800

Building = $308,000/$560,000 * $406,000 = $223,300

Equipment = $84,000/$560,000 * $406,000 = $60,900

Total apportioned amount = $406,000

b) This apportionment of value takes into consideration the proportion of each asset's fair value to the purchase price. For example, Land's proportion is equal to 30% ($168,000/$560,000), Building's = 55%, and Equipment's = 15%.