Question

Red Rock Bakery purchases land, building, and equipment for a single purchase price of $580,000. However, the estimated fair values of the land, building, and equipment are $204,000, $408,000, and $68,000, respectively, for a total estimated fair value of $680,000. Required: Determine the amounts Red Rock should record in the separate accounts for the land, the building, and the equipment.

Answer 1

Land ($174,000), building ($348,000) and equipment ($58,000)

Step-by-step explanation:

This is a case of a basket purchase. Basket purchase is usually a purchase of a group of asset. This purchase usually comes with a reduced price when compared to the individual asset's market value. Therefore, the cost of each asset would be allocated based on the individual's asset proportionate market value

Asset Estimated Fair Value Percentage Allocated Cost

(a) (b) (c) = (b)/(d)*100 (e) = (c) * $580,000

Land $204,000 30% $174,000

Building $408,000 60% $348,000

Equipment $68,000 10% $58,000

Total (d) $680,000 $580,000