Question

CityBank recently held an auction to dispose of various assets it had obtained through foreclosures and other loan settlements.  Representatives of Advantage Metals attended the auction to bid on an abandoned manufacturing plant that CityBank included in the sale.  The auction website listed the manufacturing plant to include all land, buildings, and equipment.  The website indicated that an independent appraisal had been conducted and that land was separately valued at $1,000,000, the building at $2,000,000, and the equipment at $4,000,000.  This information is believed to be reasonably accurate and fair.

Advantage Metals wanted the site for a recycling business it planned to start at the location.  All of the equipment would be used in this new operation.  The minimum bid price was set at $4,900,000.  As it turned out, the auction was poorly attended.  Advantage was only the only bidder on this property, and was fortunate to acquire the property at the opening bid minimum.

Determine the correct cost allocation to the land, buildings, and equipment, and prepare a journal entry to reflect this acquisition.

Answer 1

Please note that Advantage metals has able to close the tender at a bid price of $4,900,000 for various assets. $4,900,000 of consideration paid for the assets would be allocated to all the assets in the ratio of their Fair value. In our question, fair value is the value given in independent appraisal conducted by CityBank.

Accounting entry will be passed as:

Debit Land A/c 700,000

Debit Building A/c 1,400,000

Debit Equipment A/c 2,800,000

Credit Bank A/c 4,900,000

(Assets bought in auction for consideration of $4,900,000)