Question

On January 1, John company pays a lump-sum amount of $2,600,000 for land, Building 1, Building 2, and Land Improvements 1. Building 1 has no value and will be demolished. Building 2 will be an office and is appraised at $660,000, with a useful life of 20 years and a $80,000 salvage value. Land Improvements 1 is valued at $510,000 and is expected to last another 17 years with no salvage value. The land is valued at $1,830,000. The company also incurs the following additional costs.

Cost to demolish Building 1	$	346,400
Cost of additional land grading		185,400
Cost to construct Building 3, having a useful life of 25 years and a $402,000 salvage value		2,262,000
Cost of new Land Improvements 2 having a 20-year useful life and no salvage value		168,000

1. Allocate the costs incurred by John Company to the appropriate columns and total each column.

Allocation of purchase price	Appraised value	% of total appraised value	x	total cost of acquisition	=	Apportioned cost
land			x		=
building 2			x		=
land improvements 1			x		=
totals	$	%				$
	land	building 2		building 3		land improvements1	land improvements2
purchase price
demolition
land grading
new building/construction cost
new improvements
totals	$	$		$		$	$

Answer 1

1
Allocation of Purchase Price	Appraised Value	Percent of Total Appraised Value	x	Total Cost of Acquisition	=	Apportioned Cost
Land	1,830,000	61%	x	2,600,000	=	1,586,000
Building 2	660,000	22%	x	2,600,000	=	572,000
Land Improvements 1	510,000	17%	x	2,600,000	=	442,000
Totals	3,000,000	100%				2,600,000
	Land	Building 2		Building 3		Land Improvements 1	Land Improvements 2
Purchase Price	1,586,000	572,000		0		442,000	0
Demolition	346,400	0		0		0	0
Land grading	185,400	0		0		0	0
New building (Construction cost)	0	0		2,262,000		0	0
New improvements cost	0	0		0		0	168,000
Totals	2117800	572000		2262000		442000	168000