Question

A company acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely equipped. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and equipment, respectively. At what amount would the company record the building?
(A) $1,300,000 (building), $ 780,000 (land), $520,000 (fixture).
(B) $1,200,000 (building), $ 720,000 (land), $480,000 (fixture).
(C) $ 720,000 (building), $1,200,000 (land), $480,000 (fixture).
(D) None of these answer choices are correct.

Answer 1

Answer:

(B) $1,200,000 (building), $ 720,000 (land), $480,000 (fixture).

Explanation:

The amount that was paid for the Building, Land and Equipment must be recorded at cost in the ratio of value of each significant item. After they are recorded at cost and the fair value appraisal finds that they are worth more(as was done in this example), a fair value adjustment should be done to increase the value to the correct fair value.