Straight line method, acquisition cost, and partial balance sheet
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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: Land Building Accumulated depreciation – Building Equipment Accumulated depreciation – Equipment | 346,667 260,000 (13,000) 433,333 (21,667) |
| Net, property, plant, and equipment’s | Rs. 10,05,333 |