Question

In January 2018, Dunder Mifflin Inc. bought property in downtown Scranton. The property contains land, a warehouse, and some limited equipment. Property values in the area have been increasing rapidly over the past decade. The price paid for the property needs to be allocated to the items purchased and the controller and financial vice president are having that discussion. Dunder Mifflin's controller wants to allocate the largest proportion of the cost to the warehouse and equipment while the financial VP, David Wallace, argues that the allocation should recognize the steadily increasing value of the land by allocating the highest value to the land. Assume that the same depreciation methods are used for financial and tax return purposes.

What are the pros and cons of proportionally higher allocation of the purchase cost to the land and a proportionally lower allocation to building and equipment?

Answer 1

Answer:

Pros:

• On the off chance that in future Dunder Mifflin Inc. choose to sell the land at that point, the measure of capital addition on the closeout of land will be less. As, we have expanded the measure of expense of securing of the land.
• At the point when less measure of devaluation cost will be charged, it will prompt more benefits. Hence, more measure of profit can be circulated to the investors.
• Likewise, increment in benefits can prompt increment in held profit. Which can additionally be utilized for beginning new undertakings.

Cons:

• At the point when less measure of deterioration cost will be charged, it will prompt more benefits. In this manner, increment in measure of charges paid to government. It will be progressively proper to allocate the sum based on the reasonable estimation of land, distribution center and gear.
• On the off chance that the higher assignment of procurement cost is made to the land, at that point, the expense of securing will be more. Along these lines, when the land will be sold it will prompt the decreased measure of capital increase.
• In the event that straight line strategy for devaluation is utilized and the valuable existence of both hardware and distribution center is same. At that point, according to the directions given in the inquiry, both gear and the land will be sold in the meantime.
• Higher portion of procurement cost to the land will prompt lower distribution to stockroom and hardware. As we probably am aware, deterioration is charged on the structures and hardware. Be that as it may, devaluation isn't charged ashore. This will prompt less measure of deterioration cost in the year.