The Cutting Corner paid $640,000 for a basket purchase of land...

Question

The Cutting Corner paid $640,000 for a basket purchase of land, building, and equipment. At the time of the purchase, the land had a market value of $224,000, the building's market value was $455,000 and the equipment's market value was $21,000. If the business put $240,000 as a down payment while signing a note payable for the remainder of the $640,000 purchase price, what would be the journal entry to record the basket purchase?

Accepted Answer

Alright. Let's try this one here. How did you do? The Cutting Corner paid 640,000 for a basket purchase of land, building and equipment. At the time of the purchase, the land had a market value of 224,000. The building's market value was 455 1,000, and the equipment's market value was 21,000. If the business put 240,000 down as a down payment while signing a note payable for the remainder of the 640,000 purchase price, what would be the journal entry to record the basket purchase? Alright. So with these basket purchases, the first thing we need to do, is find the total fair market value of what we bought, and then we're going to find the proportion that each asset had of that total fair market value. So let's start with that total fair market value, and we'll do each of the 3. So we had land with the fair market value of so this is the fair market value here. Land had a fair market value of 224,000 and why don't we just do everything in, we'll cut 3 zeros off of everything because everything's in 1,000. Let's just cut 3 zeros make it a little easier for ourselves. So land had a market value of 224,000. The buildings market value was 455,000. So building is going to be 455 and the equipments market value was 21. So equip for equipment is 21. Alright. So we got to find the total. This is the total fair market value. Right? And this is step 1 above. So let's go ahead, 224 plus 4 55 plus 21. What we we got a total fair market value of $700,000 worth of stuff, right? But we only paid how much? 640,000, right? So we got a discount here. So we got to figure out how to proportion this out. So remember, what we wanna do is we wanna take each asset and divide it by the total fair market value. So for land, we had 224 divided by the 700. And that'll give us its percentage. Let me get out my calculator. We've got 224 divided by 700. So that's 32% of the total. How about the next one? 455 divided by 700. So 455 divided by 700, that's for the building. Right? That gave us 65% of the total, and the rest of it is going to the equipment here. Right? 21 over 700. So 21 divided by 700, that comes out to 3% of the total. And notice, if we add those all those percentages together, that comes out to a 100%. Right? So as it should. So here we go, we've got the percentage of each. Now, all we have to do is multiply by the purchase price for each of them and see what the total amount for each is going to be. So our total purchase price was 640,000 for each. So I'm just going to multiply, remember we're doing it in 1,000 so I'm just doing the 6.40. Now let's see what we get for the land. 0.32 times 6.40, so we get 204.8, right? So that's $204,800. How about the next one? 0.65 times 640 and that comes out to 416. And the last 1, 0.03 times 640, that comes out to 19.2. So 19,200 for the Alright. Now we've got the total amount for each. So we're ready to make our journal entry, right? This is going to be the value of each of these assets to start with. So let's go ahead and do our journal entry in the full amount. In the full amount including the 1,000. So let me get out of the way, so we have some space here and we'll do it right underneath here. So I'll do it in blue. The first one was land, building, and then equipment. So those are all going to be debits, right? Because we received all of these things, so they're going to be new assets for us and assets have debits. What are going to be our credits here? Notice we didn't pay for it all with cash, right? It told us we paid some of it with cash as a down payment, but we also signed a note payable for the remainder. So there's gonna be cash. So they're trying to trick us a little bit here, but they're not gonna get us. And note payable, these are gonna be our credits, right? We had cash and note payable for our credits. So we know our debits, right? Our debits are gonna be 204,800 for the land, 416,000 for the building, and 19,200 for the equipment. Notice if we add all those numbers together, it comes out to the 640,000 total that we paid. Alright? Now what about the rest of it here? Cash, it told us we put $240,000 as a down payment. So the cash amount was $240,000 Now what about the note payable? Well, that's going to be the remainder, right? So if we paid $640,000 minus the 240,000 in cash, that means we signed a note payable for 400,000, right? So now, our journal entry balances and that's how we would do this. The main thing here is to focus on that basket purchase. Being able to split up that value of the 3 assets that we bought with that discounted price. Cool? Let's go ahead and move on to the next topic.

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