Principles of Financial Accounting.
Principles of Financial Accounting.
24th Edition
ISBN: 9781260158601
Author: Wild
Publisher: MCG
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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
Expert Solution & Answer
Check Mark
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:

AssetsFair Market Value (in $)Percent of total=(Market value of specific asset)(Market value of total assets)Allocation of the purchase price based on the percentage of total($326,000×Specific asset's percentage of total)
Land175,000$175,000$350,000 =50%163,000
Land Improvements70,000$70,000$350,000 =20%65,200
Building105,000$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.

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Chapter 10 Solutions

Principles of Financial Accounting.

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