Question

Rodriguez Company pays $358,020 for real estate with land, land improvements, and a building. Land is appraised at $202,500; land improvements are appraised at $90,000; and a building is appraised at $157,500. Required: 1. Allocate the total cost among the three assets. 2. Prepare the journal entry to record the purchase.

Answer 1

1. Land $161,109, Land improvement $71,604, Building $125,307

2. Entries required

Debit Land $161,109

Debit Land improvement $71,604

Debit Building $125,307

Credit Cash account $358,020

Being entries to record the purchase of real estate consisting of land, land improvement and a building.

Step-by-step explanation:

The real estate comprises of land, land improvements and a building whose individual appraised costs are known. These individually available cost will be the basis for apportioning the actual cost of the real estate to the individual asset accounts.

When an asset is purchased, the required adjusting entries are debit to asset and a credit to cash account.

Total appraised value of the real estate

= $202,500 + $90,000 + $157,500

= $450,000

The actual cost of;

Land

= ($202,500/$450,000) * $358,020

= $161,109

Land improvements

= ($90,000/$450,000) * $358,020

= $71,604

Building

= ($157,500/$450,000) * $358,020

= $125,307

Answer 2

The allocation of cost is as follows:

land is $161,109

improvement is $71,604

buildings is $125,307

The journal entries are:

Dr Land $161,109

Dr Improvement $71,604

Dr buildings $125,307

Cr Cash $358,020

Step-by-step explanation:

The allocation of the purchase price of $358,020 between the three distinct assets can be done on the proportion of their appraised values as computed below

Asset allocated value=the asset appraised value/total assets' appraised value*original purchase price

Land allocated value=$202,500/($202500+$90000+$157500)*$358020

=$161,109.00

Improvement allocated value=$90,000/($202500+$90000+$157500)*$358020

= $71,604.00

Buildings allocated value=$157,500/($202500+$90000+$157500)*$358020

=$125,307