Question

Timberly Construction negotiates a lump-sum purchase of several assets from a company that is going out of business. The purchase is completed on January 1, 2017, at a total cash price of \(900,000 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, \)508,800; land, \(297,600; land improvements, \)28,800; and four vehicles, \(124,800. 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 percentages to the nearest 1%). Prepare the journal entry to record the purchase.
2. Compute the depreciation expense for year 2017 on the building using the straight-line method, assuming a 15-year life and a \)27,000 salvage value.
3. Compute the depreciation expense for year 2017 on the land improvements assuming a five-year life and double-declining-balance depreciation.
   Analysis Component
4. Defend or refute this statement: Accelerated depreciation results in payment of less taxes over the asset’s life.

Short answer

1. The total cost is $900,000
2. The depreciation on the building by the straight-line method is $30,000
3. The depreciation on land improvement by the double-declining method is $10,800.
4. Accelerated depreciation results in the payment of more taxes over the asset’s life

Step-by-step solution

Computation of total cost

	Appraised value	Percentage of total	Cost
Building	$508,800
Land	$297,600
Land improvement	$28,800
Vehicle	$124,800
Total	$960,000	100%	$900,000

Journal entries:

Jan 1	Building	$477,000
	Cash		$477,000
	Record building

Jan 1	Land	$279,000
	Cash		$279,000
	Record purchase of land

Jan 1	Land improvement	$27,000
	Cash		$27,000
	Record land improvement cost

Jan 1	Vehicle	$117,000
	Cash		$117,000
	Record 4 vehicle

Computation of depreciation by straight- method on building for the year 2017

$\begin{array}{rcl}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{t}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{u}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}\\ depreciation& =& \frac{\$477,000-\$27,000}{15years}\\ depreciation& =& \frac{\$450,000}{15}\\ depreciation& =& \$30,000\end{array}$

The depreciation on the building by the straight-line method is $30,000

Computation of depreciation by double-declining line balance method on land improvement

$\begin{array}{rcl}\mathit{s}\mathit{t}\mathit{r}\mathit{a}\mathit{i}\mathit{g}\mathit{h}\mathit{t}\mathbf{}\mathit{l}\mathit{i}\mathit{n}\mathit{e}\mathbf{}\mathit{r}\mathit{a}\mathit{t}\mathit{e}& \mathbf{=}& \mathbf{100}\mathbf{\%}\mathbf{÷}\mathit{u}\mathit{s}\mathit{e}\mathit{f}\mathit{u}\mathit{l}\mathbf{}\mathit{l}\mathit{i}\mathit{f}\mathit{e}\\ straightlinerate& =& 100\%÷5years\\ & =& 20\%\end{array}$

$\begin{array}{rcl}\mathit{D}\mathit{o}\mathit{u}\mathit{b}\mathit{l}\mathit{e}\mathbf{}\mathit{d}\mathit{e}\mathit{c}\mathit{l}\mathit{i}\mathit{n}\mathit{i}\mathit{n}\mathit{g}\mathbf{}\mathit{b}\mathit{a}\mathit{l}\mathit{a}\mathit{n}\mathit{c}\mathit{e}\mathbf{}\mathit{r}\mathit{a}\mathit{t}\mathit{e}& \mathbf{=}& \mathbf{2}\mathbf{\times }\mathit{S}\mathit{t}\mathit{r}\mathit{a}\mathit{i}\mathit{g}\mathit{h}\mathit{t}\mathbf{}\mathit{l}\mathit{i}\mathit{n}\mathit{e}\mathbf{}\mathit{r}\mathit{a}\mathit{t}\mathit{e}\\ doubledecliningbalancerate& =& 2\times 20\%\\ & =& 40\%\end{array}$

$\begin{array}{rcl}\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{e}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}& \mathbf{=}& \mathit{D}\mathit{o}\mathit{u}\mathit{b}\mathit{l}\mathit{e}\mathbf{}\mathit{d}\mathit{e}\mathit{c}\mathit{l}\mathit{i}\mathit{n}\mathit{i}\mathit{n}\mathit{g}\mathbf{}\mathit{b}\mathit{a}\mathit{l}\mathit{a}\mathit{n}\mathit{c}\mathit{e}\mathbf{}\mathit{r}\mathit{a}\mathit{t}\mathit{e}\mathbf{\times }\mathit{B}\mathit{e}\mathit{g}\mathit{i}\mathit{n}\mathit{n}\mathit{i}\mathit{n}\mathit{g}\mathbf{}\mathit{p}\mathit{e}\mathit{r}\mathit{i}\mathit{o}\mathit{d}\mathbf{}\mathit{b}\mathit{o}\mathit{o}\mathit{k}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\\ depreciationexpense& =& \$=40\%\times \$27,000\\ \mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{800}\end{array}$

The depreciation on land improvement by the double-declining method is $10,800.

The given statement is wrong.

Accelerated depreciation results in the payment of more taxes over the asset’s life. Many companies use accelerated depreciation in computing taxable income. Reporting higher depreciation expense in the early years of an asset’s life reduces the company’s taxable income and increases it later when the depreciation expense is lower. The company’s goal here is to postpone its tax payments.