Carlos Co, purchased building and land for $400,000 total. Individually, the land appraised for $84,000 and the building appraised for $336,000. How much of the purchase price should be allocated to the cost of the land?

Answer: $80,000

Explanation:

In acquisition accounting, the practice of Purchase Price Allocation in which the purchase price is allocated to the various assets involved is a very important step in Accounting reporting.

To calculate it, you take the proportion of an asset and multiply it by the total purchase price.

Doing that would look something like,

Amount allocated to Land = 400,000 x 84,000/420,000

= $80,000

The 84,000/420,000 is the proportion of the amount that Land contributed to the price with $420,000 being the sum of the appraised amount for the Land and building.

Land should be allocated the sum of $80,000.

Explanation:

The ratio of land to building valued individually is 1 : 4 $ (84,000 : 336,000).

This means that one-fifth (20%) of the total of $400,000 is allocated to Land based on the above ratio. This gives us $80,000 (20% of $400,000). Alternatively, we can still work with the cost savings of $20,000 and then deduct $4,000 (20% of $20,000) from the individual value of land.

The remaining four-fifth (80%) of the total of $400,000 goes to Building. This will give $320,000 (80% of $400,000). Alternatively, with the cost savings of $20,000 and applying 80% will give us $16,000 as cost saving to the Building to arrive at $320,000.