Question 12: Pearl Inc. Purchased Land, Building, And Equipm

Question 12pearl Inc Purchased Land Building And Equipment From Lag

Question 12 Pearl Inc. purchased land, building, and equipment from Laguna Corporation for a cash payment of $459,900. The estimated fair values of the assets are land $87,600, building $321,200, and equipment $116,800. At what amounts should each of the three assets be recorded? (Round intermediate percentage calculations to 5 decimal places e.g. 18.25124 and final answers to 0 decimal places, e.g. 5,275.) Recorded Amount Land $

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Introduction

The purchase of assets such as land, building, and equipment requires allocating the total purchase price based on their relative fair values. In accounting, this process ensures that each asset is recorded at its fair value proportionate to the total fair value of the assets acquired. This paper details the calculation process to determine the recorded amounts of each asset purchased by Pearl Inc., based on the given fair values and total purchase price, with precise rounding as specified.

Analysis of Asset Values and Purchase Price

Pearl Inc. purchased three different types of assets for $459,900. The estimated fair values are:

- Land: $87,600

- Building: $321,200

- Equipment: $116,800

The first step involves calculating the total fair value of all assets combined:

Total fair value = $87,600 + $321,200 + $116,800 = $525,600

Next, the proportion of each asset's fair value relative to the total fair value is computed:

- Land proportion = $87,600 / $525,600

- Building proportion = $321,200 / $525,600

- Equipment proportion = $116,800 / $525,600

Calculating the proportions with high precision:

- Land proportion = 0.166533

- Building proportion = 0.61057

- Equipment proportion = 0.222898

(Note: Rounded to five decimal places as specified)

Now, these proportions are used to allocate the total purchase price of $459,900 to each asset:

- Land recorded amount = $459,900 * 0.16653

- Building recorded amount = $459,900 * 0.61057

- Equipment recorded amount = $459,900 * 0.22290

Performing the calculations:

- Land = $459,900 * 0.16653 ≈ $76,583

- Building = $459,900 * 0.61057 ≈ $281,411

- Equipment = $459,900 * 0.22290 ≈ $102,906

Each of these amounts is rounded to the nearest dollar, as per instructions.

Final Allocated Asset Amounts

- Land: $76,583

- Building: $281,411

- Equipment: $102,906

These amounts should be recorded as the assets' book values on the balance sheet of Pearl Inc., reflecting their fair value proportions based on the purchase price.

Conclusion

Allocating the purchase price among multiple assets requires calculating their fair value proportions and applying these to the total amount paid. This method ensures equitable and consistent asset valuation in accordance with accounting standards, facilitating transparent financial reporting and asset management by Pearl Inc.

References

  • Banker, R. D. (2020). Principles of Financial Accounting. McGraw-Hill Education.
  • FASB (Financial Accounting Standards Board). (2021). Accounting Standards Codification (ASC) 805: Business Combinations.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2020). Managerial Accounting. McGraw-Hill Education.
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting. Wiley.
  • Lehman, C. A. (2019). Financial Accounting. Cengage Learning.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2021). Financial Accounting Theory and Analysis. Wiley.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial & Managerial Accounting. Wiley.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2018). Financial Statement Analysis. Pearson.
  • AccountingTools. (2022). Asset Acquisition and Allocation.
  • Investopedia. (2022). Fair Value in Asset Acquisition.

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