Rodriguez Company pays $375,000 for real estate plus $19,875 in closing costs. The real estate consists of land appraised at $189,000; land improvements appraised at $63,000; and a building appraised at $168,000. Required: 1. Allocate the total cost among the three purchased assets. 2. Prepare the journal entry to record the purchase.

1. Land cost $177,693.75

  Land improvement cost $59,231.25

  Building cost $157,950 .00

2. Debit Land  $177,693.75

   Debit  Land improvements  $59,231.25

   Credit Building $157,950 .00

Being entry to record the cost of real estate purchased.

Explanation:

Total cost of the real estate purchase will include the closing cost which is a key cost element. The allocated costs among the 3 purchased assets will be done proportionally to the appraised cost of each asset.

Total appraised value of the real estate purchased

= $189,000 + $63,000 + $168,000

= $420,000

Total cost of real estate based on payment

= $375,000 + $19,875

= $394,875

Cost allocated to;

Land improvements = ($63,000/$420,000) × $394,875

= $59,231.25

Land = ($189,000/$420,000) × $394,875

= $177,693.75

Building = ($168,000/$420,000) × $394,875

= $157,950 .00

The entry required would be debits to the individual assets account and a lump sum credit to cash for the transaction.

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