Students Will Calculate The Cost That Should Be Assigned To

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 allocation of acquisition costs among land, buildings, and equipment is a fundamental aspect of proper accounting for long-term assets. When a company purchases multiple assets simultaneously for a lump sum, it must accurately allocate the total purchase price to each asset based on their fair market values. This procedure ensures compliance with accounting standards and provides transparency in financial statements.

In the case of Sam's Corporation, the total purchase amount was $550,000. An appraisal valued the land at $180,000, the building at $285,000, and the equipment at $175,000. The total of these appraised values is $640,000 ($180,000 + $285,000 + $175,000). To allocate the $550,000 purchase price, the corporation must first determine the proportion of each asset's fair value relative to the total appraised value, then apply these proportions to the purchase price.

Calculations are as follows:

  • Land: ($180,000 / $640,000) × $550,000 ≈ $154,687.50
  • Building: ($285,000 / $640,000) × $550,000 ≈ $244,687.50
  • Equipment: ($175,000 / $640,000) × $550,000 ≈ $149,687.50

Thus, the costs assigned are approximately $154,688 for land, $244,688 for the building, and $149,688 for equipment (rounded to the nearest dollar). This allocation ensures that each asset is recorded at its fair value portion of the total purchase, consistent with GAAP guidelines to attribute costs based on fair value.

Recording the journal entry involves debiting each asset account and crediting cash or accounts payable for the total amount, adjusting for any purchase costs such as the appraisal fee. The entry might be as follows:

Dr. Land                    $154,688


Dr. Building                $244,688


Dr. Equipment               $149,688


Cr. Cash or Accounts Payable    $550,000

Additionally, any costs related directly to acquisition, such as the appraisal fee, should be capitalized and included in the asset's cost. In this scenario, the appraisal fee of $50,000, if considered part of the purchase costs, would be added proportionally or allocated based on the assets' fair values, depending on the accounting policy.

Allocating the lump sum purchase among individual assets is necessary because it provides accurate asset valuation, helps determine depreciation expense accurately, and reflects the economic realities of the assets purchased. Proper allocation ensures that asset depreciation reflects the true consumption of the assets over their useful lives and facilitates more meaningful financial analysis.

To qualify as property, plant, and equipment (PP&E), an asset must have characteristics including:

  • Physical substance: the asset must be tangible
  • Usage in operations: the asset must be used in the production or supply of goods and services, rental to others, or for administrative purposes
  • Long-term life: the asset is expected to be used over multiple periods, typically more than one year
  • Able to be reliably measured: the cost of the asset can be established with reasonable certainty

Recording property, plant, and equipment at historical cost offers several advantages. It provides an objective, verifiable measurement basis, enhances comparability across different periods and entities, and reduces the influence of market fluctuations on asset valuation. Historical cost also facilitates depreciation calculations, which systematically allocate the asset's cost over its useful life, reflecting consumption and wear and tear. This consistent basis for valuation fosters transparency and accountability in financial reporting, aligning with GAAP standards.

References

  • Accounting Standards Codification (ASC) Topic 360, Property, Plant, and Equipment. (2022). Financial Accounting Standards Board (FASB).
  • Gibson, C. H. (2020). Financial Reporting & Analysis (14th ed.). Cengage Learning.
  • Horngren, C. T., Datar, S. M., & Rajan, M. (2019). Cost Accounting: A Managerial Emphasis (16th ed.). Pearson.
  • International Financial Reporting Standards (IFRS) Foundation. (2022). IAS 16 - Property, Plant and Equipment.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2021). Financial Statement Analysis (12th ed.). McGraw-Hill Education.
  • Revsine, L., Collins, D., Johnson, W., & Mittelstaedt, F. (2015). Financial Reporting and Analysis (7th ed.). Pearson.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis: Text and Cases (12th ed.). Wiley.
  • Radebaugh, L. H., Gray, S. J., & Black, E. L. (2019). International Accounting and International Financial Reporting Standards (7th ed.). Pearson.
  • Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2020). Financial Reporting, Financial Statement Analysis and Valuation (9th ed.). Cengage Learning.

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