What is a lump-sum purchase, and how is it accounted for?
Lump-sum purchase is the purchasing of assets in the groups. The accounting for this type of purchase is based on the relative-market-value method.
Lump-sum purchase is a kind of basket purchase in which several assets are purchased in a group and payment is made in a lump sum for all assets in the group.
Thus the lump sum price represents the group of assets cost and not the individual asset cost.
Lump-sum purchase is accounted for based on the relative-market-value method.
Under this method, the total cost of the group asset is divided according to their relative market value.
For example, the lump sum amount for a group of two assets is $10,00,000 and the relative market value for asset one is $700,000 and for the second asset is $500,000. So the $10,000,000 would be allocated based on the relative value of both assets.
Asset one would be allocated 58% and second asset would be allocated 42% respectively.
Recording partial-year depreciation and sale of an asset On January 2, 2017, Comfy Clothing Consignments purchased showroom fixtures for $17,000 cash, expecting the fixtures to remain in service for five years. Comfy has depreciated the fixtures on a double-declining-balance basis, with zero residual value. On October 31, 2018, Comfy sold the fixtures for $7,600 cash. Record both depreciation expense for 2018 and sale of the fixtures on October 31, 2018.
Whitney Plumb Associates surveys American eating habits. The company’s accounts include Land, Buildings, Office Equipment, and Communication Equipment, witha separate Accumulated Depreciation account for each asset. During 2018, WhitneyPlumb completed the following transactions:
Jan. 1 Purchased office equipment, $117,000. Paid $77,000 cash and financedthe remainder with a note payable.
Apr. 1 Acquired land and communication equipment in a lump-sumpurchase. Total cost was $350,000 paid in cash. An independentappraisal valued the land at $275,625 and the communication equipmentat $91,875.
Sep. 1 Sold a building that cost $520,000 (accumulated depreciation of $285,000through December 31 of the preceding year). Whitney Plumb received$390,000 cash from the sale of the building. Depreciation is computed ona straight-line basis. The building has a 40-year useful life and a residualvalue of $25,000.
Dec. 31 Recorded depreciation as follows:
Communication equipment is depreciated by the straight-line methodover a five-year life with zero residual value.Office equipment is depreciated using the double-declining-balancemethod over five years with a $2,000 residual value.
Record the transactions in the journal of Whitney Plumb Associates.
Changing the estimated life of an asset
Assume that Smith’s Auto Sales paid $45,000 for equipment with a 15-year life and zero expected residual value. After using the equipment for six years, the company determines that the asset will remain useful for only five more years.
1. Record depreciation expense on the equipment for Year 7 by the straight-line method.
2. What is accumulated depreciation at the end of Year 7?
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