Question

Exercise 8-3 (Algo) Lump-sum purchase of plant assets LO C1 Rodriguez Company pays $389,610 for real estate with land, land improvements, and a building. Land is appraised at $247,500; land improvements are appraised at $55,000; and the building is appraised at $247,500. 1. Allocate the total cost among the three assets. 2. Prepare the journal entry to record the purchase.

Answer 1

1. Land $175,324.50

Land improvements $38,961

Building $175,324.50

2. Dr Land $175,324.50

Cr Cash $175,324.50

Being entries to recognize cost incurred in the purchase of Land

Dr Land improvements $38,961

Cr Cash $38,961

Being entries to recognize cost incurred in the purchase of Land improvements

Dr Building $175,324.50

Cr Cash $175,324.50

Being entries to recognize cost incurred in the purchase of Building

Step-by-step explanation:

Using the appraisal method to apportion the cost of an asset to the components of the asset involves the consideration of the appraised cost of each individual item as a portion of the total cost of the asset.

Thus, given that Rodriguez Company pays $389,610 for real estate with land, land improvements, and a building

Appraised cost of

Land = $247,500

Land improvements = $55,000

Building = $247,500

Total appraised cost of the asset = $247,500 +$55,000 + $247,500

= $550,000

Allocated cost of;

Land = $247,500/$550,000 * $389,610

= $175,324.50

Land improvements = $55,000/$550,000 * $389,610

= $38,961.00

Building = $247,500/$550,000 * $389,610

= $175,324.50

Journal entries

Dr Land $175,324.50

Cr Cash $175,324.50

Being entries to recognize cost incurred in the purchase of Land

For journal entries, we debit each of the individual assets account and credit cash to recognize the cost incurred in the purchase of the asset.