Chapter 8, Problem 1MCQ

To determine

Lump Sum Purchase:

When the assets are purchased or bought in a lot in one transaction at a lump sum price that is called lump sum purchase. In lump sum purchase, apportion cost of purchase on the basis of relative market value can be anticipated by appraisal.

To Identify: The apportioned cost.

Explanation of Solution

‘Option b, Land, $163,000; land improvements, $60,000; building, $97,800.’ is correct.

Given,

Land appraised value is $175,000.

Land improvements appraised value is $70,000.

Buildings appraised value is $105,000.

Total amount paid by the company is 326,000.

Formula of total appraised value:

  $\text{Total}\text{Appraised}\text{value}=\left(\begin{array}{l}\text{Appraised}\text{value}\text{of}\text{land}+\\ \text{Appraised}\text{value}\text{of}\text{land}\text{improvements}+\\ \text{Appraised}\text{value}\text{of}\text{building}\end{array}\right)$

Substitute $175,000 as the appraised value of land, $70,000 as the appraised value of land improvements and $105,000 as the appraised value of the building in the above formula,

  $\begin{array}{c}\text{Total}\text{appraised}\text{value}=\$175,000+\$70,000+\$105,000\\ =\$350,000\end{array}$

Total appraised value is $350,000

Percentage of total

Formula to calculate percentage of total:

  $\text{Percentage}\text{of}\text{total}=\frac{\text{Appraised}\text{value}}{\text{Total}\text{appraised}\text{value}}$

Land

Substitute $175,000 as the appraised value of land and $350,000 as the total appraised value in the above formula,

  $\begin{array}{c}\text{Percentage}\text{of}\text{land}=\left(\frac{\$175,000}{\$350,000}\right)\\ =50\%\end{array}$

Percentage of land is 50%

Land improvements

Substitute $70,000 as the appraised value of land improvements and $350,000 as the total appraised value,

  $\begin{array}{c}\text{Percentage}\text{of}\text{land}\text{improvements}=\left(\frac{\$70,000}{\$350,000}\right)\\ =20\%\end{array}$

Percentage of land improvements is 20%.

Building

Substitute $105,000 as the appraised value of the building and $350,000 as the total appraised value.

  $\begin{array}{c}\text{Percentage}\text{of}\text{building}=\left(\frac{\$105,000}{\$350,000}\right)\\ =30\%\end{array}$

Percentage of building is 30%.

Apportioned cost

Given,

Total amount paid is $326,000

Formula to calculate Apportioned cost:

  $\text{Apportioned}\text{cost}=\text{Perentage}\text{of}\text{total}\times \text{Amount}\text{paid}$

Land

Substitute 50% as the percentage of total for land and $326,000 as amount paid,

  $\begin{array}{c}\text{Apportioned}\text{cost}=50\%\times \$326,000\\ =\$163.000\end{array}$

Apportioned cost of land is $163,000.

Land Improvements

Substitute 20% as the percentage of total for land improvements and $326,000 as amount paid,

  $\begin{array}{c}\text{Apportioned}\text{cost}=20\%\times \$326,000\\ =\$65,200\end{array}$

Apportioned cost of land improvements is $65,200.

Building

Substitute 30% as the percentage of total for building and $326,000 as amount paid,

  $\begin{array}{c}\text{Apportioned}\text{cost}=30\%\times \$326,000\\ =\$97,800\end{array}$

Apportioned cost of building is $97,800.

Hence , therefore the answer is ‘option b’.