Land, a building and equipment are acquired for a lump sum of $1,000,000. The market values of the land, building and equipment are $300,000, $600,000 and $300,000, respectively. What is the cost assigned to the equipment?

Select one:

a. $200,000

b. $250,000

c. $333,333

d. $300,000

The answer is option (b). $250,000

Explanation:

Step 1: Determine total market value

The expression for the total market value is;

Total market value=land value+building value+equipment value

where;

land value=$300,00

building value=$600,000

equipment value=$300,000

replacing;

Total market value = (300,000+600,000+300,000) = $1,200,000

Total market value=$1,200,000

Step 2: Determine fraction of the total market value that is equipment

Equipment fraction=equipment value/total market value

where;

equipment value=$300,000

total market value=$1,200,000

replacing;

Equipment fraction=300,000/1,200,000=0.25

Step 3: Determine cost assigned to the equipment

Cost assigned to the equipment=equipment fraction*lump sum

where;

equipment fraction=0.25

lump sum=$1,000,000

replacing;

Cost assigned to the equipment = (0.25*1,000,000) = 250,000

Cost assigned to the equipment=$250,000