On December 1, 2014, Xeon Company bought land and an accompanying warehouse from Yen Company for $800,000. The fair market values of the land and the building at the time of purchase were $700,000 and $300,000, respectively. How much of the purchase price should Xeon Company allocate to the land and how much should be allocated to the building?

Question

Jacklyn

Business

4 February, 12:08

On December 1, 2014, Xeon Company bought land and an accompanying warehouse from Yen Company for $800,000. The fair market values of the land and the building at the time of purchase were $700,000 and $300,000, respectively. How much of the purchase price should Xeon Company allocate to the land and how much should be allocated to the building?

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Answers (1)

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Rachael Mayer · Answer 1

The allocated amount to land is $560,000.00

The allocated amount to building is $240,000.00

Explanation:

The base cost of the asset shared between land and building would be based on the fair value amounts.

In other words, the fair values can be used as the proportion with which the cost price is shared between both assets as shown below:

Cost of building = fair value of building/total fair values*base cost

=$300000 / ($300000+$700000) * $800000

=$240,000.00

Cost of land=fair value of land/total fair values*base cost

=$700000 / ($300000+$700000) * $800000

=$560,000.00