Nagy Company negotiates a lump-sum purchase of several assets from a contractor

Question

Nagy Company negotiates a lump-sum purchase of several assets from a contractor who is relocating. The purchase is completed on January 1, 2015, at a total cash price of $1,800,000 for a building, land, land improvements, and five trucks. The estimated market values of the assets arc building, $890,000; land, $427,200: land improvements, $249,200; and five trucks, $213,600. The company's fiscal year ends on December 31. Required 1. Prepare a table to allocate the lump-sum purchase price to the separate assets purchased (round percents to the nearest 1%). Prepare the journal entry to record the purchase. 2. Compute the depreciation expense for year 2015 on the building using the straight-line method, assuming a 12-year life and a $120,000 salvage value. 3. Compute the depredation expense for year 2015 on the land improvements assuming a 10-ycar life and double-declining-balance depreciation. Analysis Component 4. Defend or refute this statement: Accelerated depreciation results in payment of more taxes over the asset's life. On January 2. Manning Co. purchases and installs a new machine costing $324,000 with a five-year life

Explanation / Answer

Part 1)

The allocation is computed with the use of following table:

_______

The journal entry is as follows:

_______

Part 2)

The depreciation expense for the year 2015 is calculated as follows:

Depreciation Expense (SLM) = (Cost - Salvage Value)/Estimated Life = (900,000 - 120,000)/12 = $65,000

_______

Part 3)

The depreciation expense on land improvements with the use of double declining method is calculated as follows:

Double Declining Rate = 1/(Estimated Life)*2 = 1/10 = 10%*2 = 20%

Depreciation Expense = Cost of Land Improvement*Double Declining Rate = 252,000*20% = $50,400

_______

Part 4)

I would not agree with the above mentioned statement. Accelerated depreciation would result in higher depreciation and lower taxes in the initial years of the useful life of the asset. This would result in the deferment of tax liabilities in the subsequent years. The overall tax liability over the asset's life would more or less be the same.

Asset Market Value Weight of Each Asset (A) Total Cash Value (B) Allocated Value (A*B) Building 890,000 50% (890,000/1,780,000*100) 1,800,000 900,000 Land 427,200 24% (427,200/1,780,000*100) 1,800,000 432,000 Land Improvements 249,200 14% (249,200/1,780,000*100) 1,800,000 252,000 Trucks 213,600 12% (213,600/1,780,000*100) 1,800,000 216,000 Total 1,780,000 100% 1,800,000

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