Question

A Recording lump-sum asset purchases, depreciation, and disposals Ellie Johnson Associates surveys American eating habits. The company’s accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each depreciable asset. During 2018, Ellie Johnson Associates completed the following transactions:

Jan. 1 Purchased office equipment, \(113,000. Paid \)80,000 cash and financed the remainder with a note payable.

Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(310,000 paid in cash. An independent appraisal valued the land at \)244,125 and the communication equipment at \(81,375.

Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Ellie Johnson Associates received \)420,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.

Dec. 31 Recorded depreciation as follows: Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value. Office equipment is depreciated using the double-declining-balance method over five years with a \)1,000 residual value.

Record the transactions in the journal of Ellie Johnson Associate

Short answer

Answer

A business entity will generate a profit of $193,250on the sale of the building.

Step-by-step solution

Definition of Depreciation

The expenses charged for the purpose of reporting the decline in the value of the fixed assets acquired by the company are known as depreciation expenses. Such expenses are reported in the statement reporting net income.

Recorded Journal entries in the book of Ellie Johnson Associate

$$\begin{gathered} Depreciation\frac{100\%}{Usefullife}\times 2\times Depreciablebae \\ =\frac{100\%}{5}\times 2\$113,000 \\ =\$45200 \end{gathered}$$

Date	Accounts & Explanation	Debit ($)	Credit ($)
Jan 1	Office Equipment	113,000
	Cash		80,000
	Note Payable		33,000
	(To record the purchase of office equipment)
April 1	Land	232,500
	Communication Equipment	77,500
	Cash		310,000
Sep 1	Cash	420,000
	Accumulated depreciation	293,250
	Building		520,000
	Profit on sale		193,250
Dec 31	Depreciation expenses – communication equipment	11,625
	Accumulated depreciation – communication equipment		11,625
Dec 31	Depreciation expenses – office equipment	45,200
	Accumulated depreciation – office equipment		45,200

Working notes:

1. Allocating appraised value in lump-sum purchase:

Lot	Appraisal Fair Value
Land	$244,125
Communication equipment	81,375
Total Appraisal Fair Value	$ 325,500

Land

$$\begin{gathered} Appraisalratio-Land=\frac{Appraisedvalueofland}{Totalappraisedvalue} \\ =\frac{\$244,125}{\$325,500} \\ =0.75 \end{gathered}$$

Communication equipment

$$\begin{gathered} Appraisalratio-Equipment=\frac{Appraisedvalueofequipment}{Totalappraisedvalue} \\ =\frac{\$81,375}{\$325,500} \\ =0.25 \end{gathered}$$

Allocation of cash:

Particular	Cash paid	X	Ratio	=	Allocated cost $
Land	$310,000	X	0.75	=	$232,500
Communication equipment	$310,000	X	0.25	=	77,500
					$310,000

1. Depreciation for building sold in September:

role="math" localid="1656138956802" $$\begin{gathered} \frac{Depreciation-Cost-Salvagevalue}{Usefullife}\times \frac{8}{12} \\ =\frac{\$520,000-\$25,000}{40}\times \frac{8}{12} \\ =\$8,250 \end{gathered}$$

2. Depreciation of communication equipment:

$$\begin{gathered} \frac{Depreciation-Cost-Salvagevalue}{Usefullife}\times \frac{9}{12} \\ =\frac{\$77,500-\$0}{5}\times \frac{9}{12} \\ =\$11,625 \end{gathered}$$

1. Depreciation of office equipment