Question

Mohave Inc. purchased land, building, and equipment from Laguna Corporation for a cash payment of $315,000.Theestimatedfairvaluesoftheassetsareland$60,000, building $220,000,andequipment$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

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