(Basket purchase, LO 2, 3, 5) Quabbin Corp. (Quabbin) is a small manufacturing company in Regina. It is owned by five shareholders, two of whom manage the company. The other three are silent investors who invested when the company was struggling financially. The three silent investors live in British Columbia. Quabbin also has significant borrowings from the bank and it anticipates that it will have to request a significant increase in its line of credit in the next few months.

Recently Quabbin purchased some land, a building, and a number of pieces of used equipment from a bankrupt company. The total cost of the bundle of goods was

$4,500,000. For accounting purposes Quabbin estimates that the building will last about 12 years and the equipment should last about five years. It is expected that neither the building nor the equipment will have any residual value. For tax purposes CCA on the building can be charged at 4% per year on a declining balance basis.

CCA on the equipment is 30% per year declining balance. CCA cannot be claimed on the land.

The land, building, and equipment were appraised by Quabbin to ensure it was getting a good deal before they were purchased. The land was appraised at between

$950,000 and $1,300,000, the building at between $2,100,000 and $2,800,000, and the equipment at between $1,500,000 and $2,000,000.

You have been asked for advice by Quabbin’s controller about how to account for the purchase of the land, building, and equipment. The controller has requested that you explain your recommendation fully so that he can in turn explain the situation to the managers. Your report should also provide the journal entry that Quabbin would make to record its purchase of the land, building, and equipment.

Required:

Prepare the report.