Question

All applicable Exercises are available in Connect Exercise 6.7 Basket purchase allocation Dorsey Co. has expanded its operations by purchas- LO1 ing 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.

Answer 1

a)

cost of land to be recorded=	appraised value for land                    *	purchase cost of land and buliding
	appraised value for land and buliding

=$60000           *    $255000

$240000+$60000

=$51,000

cost of land to be recorded is $51000

b)unlike buildings and other assets land donot carry the depreciation as they have the infinite life.so the no depreciation can be charged to the profit and loss account unlike the building so if the little purchase price is allocated to the land will increase the value of building and hence more depreciation can be charged on it.as the value of land is capitalized has no effect on income of the company

c)appraised value of the asset is the current market value or fair value of the asset .As the dorsey company will record the asset with appraised value rather than purchase price because it will depict the correct depreciation and correct value of land and building as the land has no depreciation we must divide the portions to charge depreciation to income statement

d)as per gaap,if the land and building is bought and intially use land by demolishing the building we must record the cost of the demolition as land improvement

so as given in the case that building is demolished to use the land as a parking space to the employees,the cost to be recorded as improvement to land

so the cost  of land to be recorded is $51000+$20000=$71000