In the prior section, we determined the total historical cost of the February 1 purchased land by Spivey Company was $262,800. Assume Spivey is paying 20% down and financing the rest. We would record this purchase as follows:

We also determined the total historical cost of the building completed on June 30 was $490,000. Assume the contractor Spivey hired took out a construction loan to finance the construction as it progressed, and now the entire amount is due and Spivey is paying with a check. We would record this purchase as follows:

Similarly, Spivey determined the total cost of machinery was $162,000. Assume a $50,000 down payment and a note for the balance. The entry would be:

Lump Sum Purchases

Sometimes a company buys land and other assets for a lump sum. When land and buildings purchased together are to be used, the firm divides the total cost and establishes separate ledger accounts for land and for buildings. This division of cost establishes the proper balances in the appropriate accounts. This division is especially important later because the depreciation recorded on the buildings affects reported income, while no depreciation is taken on the land.

Let’s look at an example: Assume in addition to the above transactions, on October 1 Spivey added additional production capacity by purchasing a faltering competitor’s land, machinery, and building for $400,000. After the purchase, in order to allocate the cost, Spivey hired an appraiser who determined the land had a market value of $135,000, machinery of $67,500, and the building of $247,500 for a total value of $450,000. We cannot report the assets at the appraiser’s estimate of market value since Generally Accepted Accounting Principles (GAAP) requires us to use historical cost. Instead, we use a two-step process to get the cost of each asset.

1. Calculate each asset’s percent of market value.  (Asset market value / total market value of all assets.)

2. Calculate the cost of each asset (total price paid for all assets x % of market value).

The journal entry to record this purchase for cash of $100,000 and a note for $300,000 would be:

In reality, the cost of the machinery would be allocated in detail, because we want to be able to track computers; each piece of equipment; desks; vehicles; and each distinct asset, including different buildings if we have more than one in the lump sum purchase. In short, each item should have an allocated cost.

After posting the journal entries for Spivey, we would see the following balances in the general ledger (GL) control accounts:

In addition to the GL, we would have subsidiary ledgers or lists for each control account that would match the total but would give details of each asset. These lists would include but not be limited to location; purchase date; purchase price; description; and, as we’ll see in the next section, the useful life, method of depreciation, accumulated depreciation, and a host of other information (e.g., serial number, internal tracking number, department, etc.).