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

Quizplus · Accepted Answer

The purchase price needs to be allocated between the land and the building based on their relative fair market values. The total fair market value is $1,000,000 ($700,000 for land and $300,000 for building). To determine the allocation, we can use the following formula: 
Allocation to Land = (Fair Market Value of Land / Total FMV) x Purchase Price
Allocation to Building = (Fair Market Value of Building / Total FMV) x Purchase Price

Using this formula, we get:
Allocation to Land = ($700,000 / $1,000,000) x $800,000 = $560,000
Allocation to Building = ($300,000 / $1,000,000) x $800,000 = $240,000

Therefore, Xeon Company should allocate $560,000 to the land and $240,000 to the building. Choice C is the correct answer.

On December 1, 2014, Xeon Company Bought Land and an Accompanying