Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 8

Basket purchase allocation Crow Co. purchased some of the machinery of Hare, Inc., a bankrupt competitor, at a liquidation sale for a total cost of $33,600. Crow’s cost of moving and installing the machinery totaled $3,200. The following data are available:

	Hare’s Net Book
	Value on the	List Price of	Appraiser’s Estimate
Item	Date of Sale	Same Item If New	of Fair Value
Punch press	$20,160	$36,000	$24,000
Lathe	16,128	18,000	1 2,000
Welder	4,032	6,000	4,000

Required:

a. Calculate the amount that should be recorded by Crow Co. as the cost of each piece of equipment.

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b. Which of the following alternatives should be used as the depreciable life for Crow Co.’s depreciation calculation? Explain your answer.

The remaining useful life to Hare, Inc.

The life of a new machine.

The useful life of the asset to Crow Co.

Step 1 of 2

Basket purchase allocation:

a. The equipment cost plus the cost concerning of moving and installation of machine are allocated on the basis of fair value estimate by the appraiser. The list cost of the same items would differ since the present value does not represent the equal the price at which the second-hand items are being purchased. Similarly, the net book value of the associated items at the time of selling company’s books will not be relevant to the Crow Co. (purchaser).