Calculating the Assigned Cost for Each Asset

Oct 13, 2025 by magicalceylontours.com 113 views

Understanding the Problem

In this scenario, a business purchases land, a building, and equipment in a single transaction, known as a lump-sum purchase. The total purchase price is $175,500 for the land and $67,500 for the equipment. The business needs to allocate the costs of each asset accurately to reflect its financial position.

Calculating the Assigned Cost for Each Asset

To calculate the assigned cost for each asset, we need to complete the following table:

Asset	Cost	Percentage of Total Cost
Land	$175,500
Building
Equipment	$67,500

Step 1: Calculate the Total Cost

The total cost of the purchase is the sum of the costs of the land, building, and equipment.

Total Cost = Cost of Land + Cost of Building + Cost of Equipment Total Cost = $175,500 + $67,500 Total Cost = $243,000

Step 2: Calculate the Percentage of Total Cost for Each Asset

To calculate the percentage of total cost for each asset, we need to divide the cost of each asset by the total cost and multiply by 100.

Percentage of Total Cost for Land = (Cost of Land ÷ Total Cost) × 100 Percentage of Total Cost for Land = ($175,500 ÷ $243,000) × 100 Percentage of Total Cost for Land = 72.2%

Percentage of Total Cost for Building = (Cost of Building ÷ Total Cost) × 100 Percentage of Total Cost for Building = ($X ÷ $243,000) × 100 Percentage of Total Cost for Building = 27.8%

Percentage of Total Cost for Equipment = (Cost of Equipment ÷ Total Cost) × 100 Percentage of Total Cost for Equipment = ($67,500 ÷ $243,000) × 100 Percentage of Total Cost for Equipment = 27.8%

Step 3: Calculate the Assigned Cost for Each Asset

To calculate the assigned cost for each asset, we need to multiply the percentage of total cost for each asset by the total cost.

Assigned Cost for Land = Percentage of Total Cost for Land × Total Cost Assigned Cost for Land = 72.2% × $243,000 Assigned Cost for Land = $175,500

Assigned Cost for Building = Percentage of Total Cost for Building × Total Cost Assigned Cost for Building = 27.8% × $243,000 Assigned Cost for Building = $67,500

Assigned Cost for Equipment = Percentage of Total Cost for Equipment × Total Cost Assigned Cost for Equipment = 27.8% × $243,000 Assigned Cost for Equipment = $67,500

Journal Entry

The journal entry to record the lump-sum purchase of land, building, and equipment would be:

Debit: Land $175,500 Debit: Building $67,500 Debit: Equipment $67,500 Credit: Cash $243,000

Conclusion

In conclusion, the assigned cost for each asset can be calculated by completing the table and using the percentage of total cost for each asset. The journal entry to record the lump-sum purchase of land, building, and equipment would be a debit to each asset and a credit to cash.

Importance of Accurate Asset Allocation

Accurate asset allocation is crucial in financial reporting as it reflects the true financial position of the business. Inaccurate asset allocation can lead to misstatement of financial position and result in incorrect financial decisions.

Best Practices for Asset Allocation

To ensure accurate asset allocation, businesses should follow these best practices:

Separate transactions: Separate transactions for each asset to avoid lump-sum purchases.
Accurate cost allocation: Accurately allocate costs to each asset using the percentage of total cost method.
Regular review: Regularly review and update asset allocation to reflect changes in the business.

Q1: What is a lump-sum purchase?

A lump-sum purchase is a single transaction where a business purchases multiple assets, such as land, building, and equipment, in one payment.

Q2: Why is accurate asset allocation important?

Q3: How do I calculate the assigned cost for each asset in a lump-sum purchase?

To calculate the assigned cost for each asset, you need to complete the following steps:

Calculate the total cost of the purchase.
Calculate the percentage of total cost for each asset.
Multiply the percentage of total cost for each asset by the total cost to get the assigned cost for each asset.

Q4: What is the journal entry to record a lump-sum purchase of land, building, and equipment?

The journal entry to record a lump-sum purchase of land, building, and equipment would be:

Debit: Land $175,500 Debit: Building $67,500 Debit: Equipment $67,500 Credit: Cash $243,000

Q5: Can I use the lump-sum purchase method for any type of asset?

No, the lump-sum purchase method is typically used for assets that have a similar useful life, such as land, building, and equipment. It is not recommended to use this method for assets with different useful lives, such as land and intangible assets.

Q6: How do I handle depreciation for assets purchased in a lump-sum purchase?

To handle depreciation for assets purchased in a lump-sum purchase, you need to calculate the depreciation for each asset separately using the straight-line method or the units-of-production method.

Q7: Can I use the lump-sum purchase method for assets purchased from a related party?

No, the lump-sum purchase method is not recommended for assets purchased from a related party. Instead, you should use the fair value method to determine the cost of the asset.

Q8: How do I account for the gain or loss on a lump-sum purchase?

To account for the gain or loss on a lump-sum purchase, you need to calculate the difference between the total cost of the purchase and the total fair value of the assets. If the total fair value is greater than the total cost, you will recognize a gain. If the total fair value is less than the total cost, you will recognize a loss.

Q9: Can I use the lump-sum purchase method for assets purchased in a foreign currency?

Yes, you can use the lump-sum purchase method for assets purchased in a foreign currency. However, you need to convert the foreign currency to the functional currency using the exchange rate at the date of purchase.

Q10: How do I ensure accurate asset allocation in a lump-sum purchase?

To ensure accurate asset allocation in a lump-sum purchase, you need to follow these best practices:

Separate transactions for each asset.
Accurately allocate costs to each asset using the percentage of total cost method.
Regularly review and update asset allocation to reflect changes in the business.

By following these best practices, you can ensure accurate asset allocation and reflect the true financial position of your business.