Question

Suppose a company purchased land and a building for $20,000,000 cash. The appraised value of the building was $17,000,000, and the land was appraised at $8,000,000. *Note: for calculations, round to nearest whole percentage before calculating the allocation of the purchase price (i.e., if percentage calculates out to be 0.249, then round up to 25%)* What dollar amount of the purchase price will be allocated to the Land account?

Answer 1

Answer:

The amount of the purchase price will be allocated to the Land account is $6,400,000

Explanation:

For computing the purchase price of the land, first we have to compute the weightage of both the fixed assets which are shown below:

For building = Appraised value of building ÷ total value of fixed assets '

                    = $17,000,000 ÷ $25,000,000

                    = 68%

where,

Total value of fixed assets =  Appraised value of the building +  appraised value of the land

= $17,000,000 + $8,000,000

= $25,000,000

For land       = Appraised value of land ÷ total value of fixed assets '

                    = $8,000,000 ÷ $25,000,000

                    = 32%

So, the purchase price of the land equal to

= Total purchase price of fixed assets × weightage of land

= $20,000,000 × 32%

= $6,400,000