Sonata Manufacturing Corporation decided to expand its operations and open a new facility in Illinois. Rather than constructing a new plant, Sonata negotiated a contract to purchase an existing facility from a former competitor for a total cost of $ 5,000,000. The facility included the land, building, machinery and equipment, inventory, and manufacturing supplies. The former competitor was closing its operations and decided to sell the facility at a reduced price, as reflected in the fair values of the individual assets acquired.
Description Fair Value
Building ……………………………..$ 3,200,000
Land ………………………………… 1,600,000
Machinery and Equipment…………. 864,000
Inventory ………………………….. 183,500
Manufacturing supplies…………….. 52,500
Total $ 5,900,000
The building has a remaining useful life of 20 years and Sonata expects the machinery and equipment to be productive for an additional five years from the date of acquisition. Sonata uses the straight- line method and does not use residual values when computing depreciation. Sonata accounts for inventory under the FIFO basis and expenses the supplies as consumed in operations. During the first year after the acquisition, the company sold all inventory acquired for $ 220,000 in cash and used 60% of the supplies in the production process. Assume Sonata uses a perpetual inventory system.
Required
a. Determine the proper allocation of the purchase cost to each of the assets acquired. Round all calculations to two decimal places.
b. Prepare the journal entries necessary to record the acquisition of the assets. Assume that all expenditures were made in cash.
c. Prepare the journal entries necessary to record the depreciation of the building and the machinery and equipment, the sale of inventory, and use of the manufacturing supplies. Assume acquired assets on January 1.