Rodriguez Company pays $375,000 for real estate plus $19,875 in closing costs. The real estate consists of land appraised at $189,000; land improvements appraised at $63,000; and a building appraised at $168,000. Required: 1. Allocate the total cost among the three purchased assets. 2. Prepare the journal entry to record the purchase.

1. Land cost $177,693.75

Land improvement cost $59,231.25

Building cost $157,950.00

2. Debit Land $177,693.75

Debit Land improvements $59,231.25

Credit Building $157,950.00

Being entry to record the cost of real estate purchased.

Explanation:

Total cost of the real estate purchase will include the closing cost which is a key cost element. The allocated costs among the 3 purchased assets will be done proportionally to the appraised cost of each asset.

Total appraised value of the real estate purchased

= $189,000 + $63,000 + $168,000

= $420,000

Total cost of real estate based on payment

= $375,000 + $19,875

= $394,875

Cost allocated to;

Land improvements = ($63,000/$420,000) * $394,875

= $59,231.25

Land = ($189,000/$420,000) * $394,875

= $177,693.75

Building = ($168,000/$420,000) * $394,875

= $157,950.00

The entry required would be debits to the individual assets account and a lump sum credit to cash for the transaction.

A. Land 177,693.75

Land improvements 59,231.25

Building157,950.00

B.

Journal Entry

Dr Land+/-177,693.75

Dr Land improvements+/-59,231.25

Dr Building+/-157,950.00

Cr Cash+/-394,875.00

Explanation:

Land appraised at $189,000

Land improvements appraised at $63,000 Building appraised at $168,000

TOTAL 420,000

% of Total * Total cost of Acquisition

Appraisal

volume

45% * 394,875=177,693.75Apportioned cost

15% * 394,875=59,231.25 Apportioned cost

40%*394,875=157,950.00 Apportioned cost

Total 100% = 394,875.00

Purchase price 375,000 + Closing cost 19,875 = Total cost of acquisition 394,875

For percentage use total cost divided by appraised value 189,000 / 420,000 = 45%

For percentage use total cost divided by appraised value 63,000 / 420,000 = 15%

For percentage use total cost divided by appraised value 168,000 / 420,000 = 40%

Allocation of total cost: Land (394,875x 0.45) = 177,693.75.00 + land improvement (394,875 x 0.15) = 59,231.25 + building (394,875 x 0.4) = 157,950.00

177,693.75+59,231.25+157,950.00 = Total 394,875.00

B. Journal entry to record the purchase

Dr Land+/-177,693.75

Dr Land improvements+/-59,231.25

Dr Building+/-157,950.00

Cr Cash+/-394,875.00