Students Will Calculate The Cost That Should Be Assigned

Students Will Calculate The Cost That Should Be Assigned To Land Buil

Students will calculate the cost that should be assigned to land, buildings, and equipment and provide the journal entry to record the acquisition of these assets. Sam's Corporation paid $550,000 to acquire land, building, and equipment. At the time of the acquisition, Sam paid $50,000 to have the property appraised. The following values were determined from the appraisal: Land $180,000, Building $285,000, Equipment $175,000. Respond to the following questions: What cost should Sam assign to the land, buildings, and equipment, respectively? How should the journal entry be recorded on the corporation’s books to describe this acquisition? Why is it necessary to allocate a lump sum purchase amount among the individual assets acquired? What are the characteristics that an asset must have for it to be classified as property, plant, and equipment? Generally accepted accounting principles (GAAP) requires that property, plant, and equipment should be recorded at historical cost. What are the advantages of recording property, plant, and equipment at historical cost? Please submit your assignment.

Paper For Above instruction

The acquisition of land, buildings, and equipment by a corporation involves multiple accounting considerations, particularly regarding the allocation of the total purchase price among individual assets and the recording of these assets in accordance with Generally Accepted Accounting Principles (GAAP). This paper explores the appropriate cost allocations, the journal entry to record此πthe asset acquisition, and the rationale behind these accounting practices, emphasizing the importance of accurate asset classification and valuation in financial reporting.

Cost Allocation of Land, Buildings, and Equipment

In the scenario involving Sam's Corporation, the total acquisition cost is $550,000, supplemented by a $50,000 appraisal expense. The appraisal fee, being a necessary cost to acquire the assets, should generally be capitalized as part of the purchase price. The challenge is to allocate the total purchase price among the assets—land, buildings, and equipment—based on their relative fair market values as estimated from the appraisal report.

The appraisal provides fair market values: land valued at $180,000, buildings at $285,000, and equipment at $175,000. To allocate the $600,000 of total costs (including appraisal fees), the proportion of each asset's value relative to the total appraised value should determine the allocated cost:

- Land: ($180,000 / ($180,000 + $285,000 + $175,000)) ($550,000 + $50,000) = ($180,000 / $640,000) $600,000 ≈ $168,750

- Building: ($285,000 / $640,000) * $600,000 ≈ $267,187

- Equipment: ($175,000 / $640,000) * $600,000 ≈ $164,063

This allocation ensures the purchase cost is assigned proportionally based on the assets' estimated fair values, consistent with GAAP requirements.

Journal Entry for Asset Acquisition

The journal entry to record this transaction would debit each asset account for its allocated cost and credit cash for the total amount paid, including appraisal expenses:

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Dr. Land $168,750

Dr. Building $267,187

Dr. Equipment $164,063

Cr. Cash $600,000

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The total of the debits equals the total cash paid ($550,000) plus appraisal costs ($50,000), totaling $600,000. This entry reflects the acquisition of the assets at their respective costs, adhering to the historical cost principle.

Importance of Allocating Lump Sum Purchase Price

Allocating a lump sum purchase among multiple assets is necessary because it enables accurate financial reporting and depreciation calculations. Each asset's cost basis affects its future amortization or depreciation expense, influencing net income and asset valuation. Proper allocation ensures compliance with GAAP and provides stakeholders with a truthful depiction of the company's asset base and financial position.

Characteristics of Property, Plant, and Equipment

Assets classified as property, plant, and equipment (PP&E) must meet specific characteristics: they must be tangible, used in operations, have a useful life extending beyond one year, and be held for production, rental, or administrative purposes. These assets are not intended for sale in the ordinary course of business and contribute long-term value to the company. Their tangible nature distinguishes them from intangible assets, which lack physical substance.

Advantages of Recording at Historical Cost

GAAP mandates recording PP&E at historical cost, representing the original purchase price plus any necessary expenditures to prepare the asset for its intended use. The main advantages of this approach include objectivity and reliability, as historical cost is verifiable through documentation. It provides consistency and comparability across reporting periods, reduces subjectivity, and prevents arbitrary asset valuations, thereby enhancing the credibility of financial statements.

Conclusion

Proper accounting for acquisitions of land, buildings, and equipment requires meticulous allocation and adherence to GAAP principles to ensure transparency and accuracy. Recognizing assets at historical cost ensures reliable and consistent financial reporting, facilitating meaningful analysis and decision-making. The journal entry, based on fair value proportions, correctly reflects the asset acquisition, critical for subsequent depreciation calculations and financial analysis.

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