Question

2. United Alliance Inc. paid $1,000,000 to purchase land and equipment as a package at the beginning of 2018. If the land and equipment are sold separately, land would be priced at 650,000 and equipment would be priced at $450,000. United Alliance estimated the useful life of the equipment to be 5 years with the salvage value of $50,000 or 800,000 units. The equipment produced 50,000 units in 2018. (30 marks) Required: a.Determine the purchase price for the land and the equipment and prepare the journal entry for the purchases. LI Page Break b.Calculate depreciation expense for 2018 under each of the following methods for the equipment: straight-line ii.units-of-production ili double-declining-balance 100% + English (US) Page 6 of 10 Give Feedback to Micros 735 words

Answer 1

a) Fair value of the land Fair value of the equipment Total fair value of land & equipment $650,000 $450,000 $1,100,000 [$650000+ $450000] Lumpsum purchase price paid $1,000,000 (Given] Therefore, Purchase price for the land Purchase price for the equipment $590,909 ($1000000 x ($650000 / $1100000)] $409,091 [$1000000 x ($450000 / $1100000)] Journal entry shall be: Credit General Journal Land Equipment Cash Debit $590,909 $409,091 $1,000,000

bi) Under straight-line method, Annual depreciation expense = (Capitalized cost - Residual value) / Useful life of the asset Capitalized cost of the equipment Less: Residual value Depreciable cost Useful life of the asset, years Depreciation expense for 2018 $409,091 $50,000 $359,091 5 $71,818 ($359091 / 5 years] bii) Capitalized cost Less: Residual value Depreciable cost Useful life of the asset, in units Depreciation expense per unit Number of units produced in 2018 Depreciation expense for 2018 409,091 -50,000 359,091 800,000 0.4489 [359091 / 800000 units] 50,000 $22,443 (50000 units x $0.4489] biii) Under Double Declining (Diminishing) Balance (DDB) method, Depreciation percentage = (1 / Useful life of the asset) x 2 Depreciation percentage = (1/5) x 2 = 40% (Under DDB method, depreciable cost should be cost of the asset as it doesn't consider resale value in its depreciation calculation unless the Depreciation expense for 2018 $163,636 ($409091 x 40%] book value goes below residual value in any of the years).