Chapter 10, Problem 1MCQ

A company paid $326,000 for property that included land, land improvements, and a building. The land was appraised at $175,000, the land improvements were appraised at $70,000, and the building was appraised at $105,000. What is the allocation of property costs to the three assets purchased?

1. a. Land, $150,000; Land Improvements, $60,000; Building, $90,000
2. b. Land, $163,000; Land Improvements, $65,200; Building, $97,800
3. c. Land, $150,000; Land Improvements, $61,600; Building, $92,400
4. d. Land, $159,000; Land Improvements, $65,200; Building, $95,400
5. e. Land, $175,000; Land Improvements, $70,000; Building, $105,000

To determine

Ascertain the allocation of property costs to the three assets purchased.

Explanation of Solution

Lump-Sum purchase:

If a company purchases a group of assets collectively and a lump sum amount is paid for such purchase, then it is referred to as basket purchase. The accounting term for this type of acquisition is the lump-sum purchase.

Ascertain the allocation of property costs to the three assets purchased as follows:

Assets	Fair Market Value (in $)	Percent of total=$\frac{\left(\begin{array}{l}\text{Market value of }\\ \text{specific asset}\end{array}\right)}{\left(\begin{array}{l}\text{Market value of }\\ \text{total assets}\end{array}\right)}$	Allocation of the purchase price based on the percentage of total$\left(\begin{array}{l}\$326,000\times \text{Specific asset's}\\ \text{ percentage of total}\end{array}\right)$
Land	175,000	$\frac{\$175,000}{\$350,000}$ =50%	163,000
Land Improvements	70,000	$\frac{\$70,000}{\$350,000}$ =20%	65,200
Building	105,000	$\frac{\$105,000}{\$350,000}$=30%	97,800
Total	$350,000		$326,000

Table (1)

Hence, the allocation of property costs to the three assets purchased is option b. Land, $163,000; Land Improvements, $65,200; Building, 97,800.