Question

Dorsey Co. has expanded its operations by purchasing a parcel of land with a building on it from Bibb Co. for $91,000. The appraised value of the land is $28,000, and the appraised value of the building is $107,000. Required: a. Assuming that the building is to be used in Dorsey Co.'s business activities, what cost should be recorded for the land? b. Indicate why, for income tax purposes, management of Dorsey Co. would want as little of the purchase price as possible allocated c. Indicate why Dorsey Co. allocated the cost of assets acquired based on appraised values at the purchase date rather than on the original cost of the land and building to Bibb Co. d. Assuming that the building is demolished at a cost of $11,000 so that the land can be used for employee parking, what cost should Dorsey Co. record for the land? to land. Complete this question by entering your answers in the tabs below. Required A Required B Required Required D Assuming that the building is to be used in Dorsey Co.'s business activities, what cost should be recorded for the land? (Round final answer to the nearest whole dollar amount.) Cost of land Required A Required B >

Answer 1

(A) Cost of Land = $91000 x $28000/($28000 + $107000) = $91000 x $28000/$135000 = $18874

(B) Land is not a depreciable asset.

Landvalue will not reduce taxable income.

(C) Appraised values are to be used because they represent the asset's current value.

(D) Cost of Land = $91000 + $11000 = $102000

The Building is demolished to prepare the land for employees parking use, both the purchase price plus demolition cost is added together and recorded as a Cost of land. Because it is the cost incurred for preparing the land for its use.