 # Straight line method – example | PU 2010 Fall

Straight line method, acquisition cost, and partial balance sheet

#### PU 2010 Fall Q. No. 4a

To add to his growing chain of grocery stores, on January 1, 1998, Indra Man bought a grocery store of a small competitor for Rs. 1,040,000. An appraiser was hired to assess the value of the assets acquired and determined that the land had a market value of Rs. 400,000, the building a market value of Rs. 300,000 and the equipment a market value of Rs. 500,000.

Required:

(i) What is acquisition cost of each assets? Prepare a journal entry to record the acquisition.

(ii) Indra Man plans to depreciate the operating assets on a straight-line basis for 20 years. Determine the amount of depreciation expenses for 1998 on these newly acquired assets.

(iii) How would the assets appear on the balance sheet as of December 31, 1998?

Solution:

i.

Calculation of acquisition cost of each asset:

we have,

Specific asset acquisition cost = Specific asset fair market value / Total fair market value of all assets × Total acquisition cost

Here,

Total fair mareket value = Rs. 400,000 + Rs. 300,000 + Rs. 500,000 = Rs. 12,00,000

Now,

Acquisition cost of land = Rs. 400,000 / Rs. 12,00,000 × Rs. 10,40,000 = Rs. 346,667

Acquisition cost of building = Rs. 300,000 / Rs. 12,00,000 × Rs. 10,40,000 = Rs. 260,000

Equipment’s acquisition cost = Rs. 500,000 / Rs. 12,00,000 × Rs. 10,40,000 = Rs. 433,333

### and, Journal entry

January 1, 1998

Land a/c Dr.             Rs. 346,667

Building a/c Dr.       Rs. 260,000

Equipment a/c Dr. Rs. 433,333

Cash a/c                              Rs. 10,40,000

(To record the purchase of grocery store)

ii.

Calculation of depreciation expenses

### Under straight-line method

we have,

Annual depreciation for 1998 = Acquisition cost – Salvage value / Estimated life of asset

#### For building:

Depreciation expenses = Rs. 260,000 – 0 / 20 = Rs. 13,000

#### For equipment:

Depreciation expenses = Rs. 433,333 – 0 / 20 = Rs. 21, 667

iii.

### Partial balance sheet

As of December 31, 1998

 Particulars Amount (Rs.) Property, Plant, and Equipment’s:LandBuilding Accumulated depreciation – BuildingEquipmentAccumulated depreciation – Equipment 346,667260,000(13,000)433,333(21,667) Net, property, plant, and equipment’s Rs. 10,05,333