Basket purchase allocation Dorsey Co. has expanded its operations by purchasing 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.Page 215Required:a. Assuming that the building is to be used in Dorsey Co.’s business activities, what cost should be recorded for the land?b. Explain why, for income tax purposes, management of Dorsey Co. would want as little of the purchase price as possible allocated to land.c. Explain 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 $20,000 so that the land can be used for employee parking, what cost should Dorsey Co. record for the land?

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Asked Jul 12, 2019

Basket purchase allocation Dorsey Co. has expanded its operations by purchasing 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.
Page 215
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. Explain why, for income tax purposes, management of Dorsey Co. would want as little of the purchase price as possible allocated to land.
c. Explain 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 $20,000 so that the land can be used for employee parking, what cost should Dorsey Co. record for the land? 

check_circleExpert Solution
Step 1

a. Calculate the cost that should be recorded for the land.

Appraised value of the land
Cost of the land L| Appraised value of the land and buil ding
Combined purchase cost of land and building
$60,000
x $255, 000
$240,000+$60,000
$60,000
x$255,000
$300,000
= $51,000
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Appraised value of the land Cost of the land L| Appraised value of the land and buil ding Combined purchase cost of land and building $60,000 x $255, 000 $240,000+$60,000 $60,000 x$255,000 $300,000 = $51,000

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Step 2

b. Fixed assets like land hasno depreciable value. Since land that is purchased by the company has no depreciable value, the purchase value of the land is not shown in the income statement of the company. Moreover, they are not taken into consideration for taxable income as they do not reduce the value of taxable income and the depreciation expense is not charged on land as they are not depreciable asset.

Step 3

c. The current value of an asset is termed as appraised value. During the time of acquisition, Dorsey Company. will prefer to use appraised value of an asset to allocate the cost, the appraised value is preferred more by the company than the original cos...

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