Question

Mohave Inc. purchased land, building, and equipment from Laguna Corporation for a cash payment of \(315,000. The estimated fair values of the assets are land \)60,000, building \(220,000, and equipment \)80,000. At what amounts should each of the three assets be recorded?

Short answer

Cost of land, building and equipment are $52,500, $192,500 and $70,000 respectively

Step-by-step solution

Calculation of cost of land

$\begin{array}{c}\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Land}\mathbf{=}\frac{\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Land}}{\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Land}+\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Buidling}+\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Equipment}}\mathbf{\times }\mathbf{Cash}\mathbf{}\mathbf{Payment}\\ \mathbf{=}\frac{\$60,000}{\$60,000+\$220,000+\$80,000}\mathbf{\times }\mathbf{\$}\mathbf{315}\mathbf{,}\mathbf{000}\\ =\$52,500\end{array}$

Calculation of cost of building

$\begin{array}{c}\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Building}\mathbf{=}\frac{\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Building}}{\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Land}+\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Buidling}+\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Equipment}}\mathbf{\times }\mathbf{Cash}\mathbf{}\mathbf{Payment}\\ \mathbf{=}\frac{\$220,000}{\$60,000+\$220,000+\$80,000}\mathbf{\times }\mathbf{\$}\mathbf{315}\mathbf{,}\mathbf{000}\\ =\$192,500\end{array}$

Calculation of cost of equipment

$\begin{array}{c}\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Equipment}\mathbf{=}\frac{\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Equipment}}{\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Land}+\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Buidling}+\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Equipment}}\mathbf{\times }\mathbf{Cash}\mathbf{}\mathbf{Payment}\\ \mathbf{=}\frac{\$80,000}{\$60,000+\$220,000+\$80,000}\mathbf{\times }\mathbf{\$}\mathbf{315}\mathbf{,}\mathbf{000}\\ =\$70,000\end{array}$