Chapter 7, Problem 1QC

To determine

The amount of the purchase price that should be allocated to the cost of the land.

Answer to Problem 1QC

The amount of the purchase price that should be allocated to the cost of the land is option a. $850,000.

Explanation of Solution

Plant assets:

Plant assets refer to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.

Calculate the amount of the purchase price that should be allocated to the cost of the land:

$\begin{array}{c}\left\{\begin{array}{l}\text{Allocation of purchase price}\\ \text{to the cost of the land}\end{array}\right\}=\frac{\text{Appraised price of the land}}{\left(\begin{array}{l}\text{Appraised price of the land, }\\ \text{building and equipment}\end{array}\right)}\times \left(\begin{array}{l}\text{Purchase price of}\\ \text{land, building and}\\ \text{equipment}\end{array}\right)\\ =\frac{\$1,100,000}{\left(\$1,100,000+\$660,000+\$440,000\right)}\times \$1,700,000\\ =\frac{\$1,100,000}{\$2,200,000}\times \$1,700,000\\ =\$850,000\end{array}$

From the above calculation, it is clear that $850,000 is the amount of purchase price that should be allocated to the cost of the land. Hence, the option b. $1,100,000, option c. $566,667, and option d. None of the above are the incorrect answers.

Therefore, option a. is the correct answer.