Osborne Company acquired three machines for $200,000 in a package deal.The three assets together had a book value of $160,000 on the seller's books.An appraisal costing the purchaser $2,000 indicated that the three machines had the following market values (book values are given in parentheses): Machine 1: $60,000 ($40,000)
Machine 2: $80,000 ($50,000)
Machine 3: $100,000 ($70,000)
The three assets should be individually recorded at a cost of (rounded to the nearest dollar)
Machine 1 Machine 2 Machine 3
A) $40,000 $53,333 $66,667
B) $50,000 $62,500 $87,500
C) $40,000 $50,000 $70,000
D) $50,500 $67,333 $84,167

Question

Quizplus · Accepted Answer

The cost to allocate to each machine can be calculated by multiplying the ratio of the market value of each machine to the total market value of all three machines by the total cost of the package deal.

Machine 1: $60,000 market value / $240,000 total market value = 1/4 ratio
$200,000 total cost * 1/4 ratio = $50,000

Machine 2: $80,000 market value / $240,000 total market value = 1/3 ratio
$200,000 total cost * 1/3 ratio = $66,667

Machine 3: $100,000 market value / $240,000 total market value = 5/12 ratio
$200,000 total cost * 5/12 ratio = $83,333

However, the recorded cost cannot exceed the total cost of the package deal. Therefore, we need to adjust the recorded cost of Machine 3 down to $84,167 (which is $200,000 - $50,000 - $66,667).

So the cost to be individually recorded for each machine should be:
Machine 1: $50,000
Machine 2: $66,667
Machine 3: $84,167

Therefore, the best choice is D.

Osborne Company Acquired Three Machines for $200,000 in a Package