Harbor Co. made a basket purchase. Specifically, the Company paid cash to purchase land, a building and equipment. The appraised market value of the individual items was greater that the purchase price. Which of the following shows how this purchase will affect a company’s financial statements?

Land Amount =  [Value of Land / Total value of All 3 assets] x Cash paid

Building Amount =  [Value of Building / Total value of All 3 assets] x Cash paid

Equipment Amount =  [Value of Equipment / Total value of All 3 assets] x Cash paid

Explanation:

If Harbor Co. made a basket purchase. Specifically, the Company paid cash to purchase land, a building and equipment.

The appraised market value of the individual items was greater that the purchase price.

Then the Journal entry that shows how this purchase will affect a company’s financial statements is:

Dr. Land

Dr. Building

Dr. Equipment

Cr. Cash

However since the market value of the individual assets are greater than the purchase price, we apportion values by using the formula:

Land Amount =  [Value of Land / Total value of All 3 assets] x Cash paid

Building Amount =  [Value of Building / Total value of All 3 assets] x Cash paid

Equipment Amount =  [Value of Equipment / Total value of All 3 assets] x Cash paid

When a company purchases land and pays for it in cash, the income statement will not be affected, only the balance sheet and the statement of cash flow will change.  

First of all, to be clear, even if the appraised market value was higher, the assets must be recorded at their weighted purchase cost, a company doesn't gain money when it purchases assets, it can gain or lose only when they sell them.

In the balance sheet, only assets will change. The total amount of assets will not change, only how much is reported in the accounts.

Cash will decrease, while land/building/equipment account will increase.

In the statement of cash flows, only investing activities will be affected since the purchase cost represents a cash outflow of investing activities.

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