Question

Question: Rodriguez Company pays \(375,280 for real estate plus \)20,100 in closing costs. The real estate consists of land appraised at \(157,040; land improvements appraised at \)58,890; and a building appraised at $176,670. Allocate the total cost among the three purchased assets and prepare the journal entry to record the purchase.

Short answer

The total purchase cost of real estate is $395,380.

Step-by-step solution

Cost determination for the lump-sum purchase of plant assets

Plant assets sometimes are purchased as a group in a single transaction for a lump-sum price. This transaction is called a lump-sum purchase, group, bulk, or basket purchase. When this occurs, we allocate the cost of the purchase among the different types of assets acquired based on their relative market values, which are estimated by appraisal or by using the tax-assessed valuations of the assets.

Computation of total cost

	Appraised value	Percentage of total	cost
Land	$157,040
Land improvement	$58,890
Building	$176,670
Total	$392,600		$395,380

Journal entry

Real estate	$395,380
Cash		$395,380
Record of real estate ($375,280+$20,100)