Chapter 6, Problem 6.7E

Exercise 6.7

LO 1

Basket purchase allocation Dorsey Co. has expanded its operations by purchasing a parcel of land with a building on it from Bibb Co. for $255,000. The appraised value of the land is $60,000, and the appraised value of the building is $240,000.

Required:

1. Assuming that the building is to be used in Dorsey Co.’s business activities, what cost should be recorded for the land?
2. Explain why, for income tax purposes, management of Dorsey Co. would want as little of the purchase price as possible allocated to land.
3. Explain why Dorsey Co. allocated the cost of assets acquired based on appraised values at the purchase date rather than on the original cost of the land and building to Bibb Co.
4. Assuming that the building is demolished at a cost of $20,000 so that the land can be used for employee parking, what cost should Dorsey Co. record for the land?