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Rodriguez Company pays $325,000 for real estate plus $17,225 in closing costs. The real estate consists of land appraised at $240,000; land improvements appraised at $96,000; and a building appraised at $144,000. Required: 1. Allocate the total cost among the three purchased assets. 2. Prepare the journal entry to record the purchase.

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Answer:

1. Allocated cost to three purchased assets as followed:

Land: $171,112.5

Land improvements: $68,445

Building: $102,667.5

2. The entry to record the purchase:

Dr Land                                 $171,112.5

Dr Land improvements        $68,445

Dr Building                            $102,667.5

Cr Cash                                 $342,225

Explanation:

Working note on the allocation of cost to purchased asset:

- Total cost of asset : 325,000 + 17,225 = $342,225

- Percentage of value of each assets in the three assets:

+ Land = 240,000 / (240,000 + 96,000 + 144,000) = 50%; Land improvement :  96,000 / (240,000 + 96,000 + 144,000) = 20% ; Building: 144,000 / (240,000 + 96,000 + 144,000) = 30%.

- Allocation of cost will be based on the percentage of value of each asset as followed:

Land = 342,225 x 50% = $171,112.5; Land Improvements = 342,225 x 20% = $68,445; Building : 342,225 x 30% = $102,667.5.

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