On December 1,2017,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

To allocate the purchase price to the land and building, we need to use the relative fair market values of each. 
The total fair market value of the land and building is $1,000,000 ($700,000 + $300,000). 
Therefore, the percentage of the fair market value that the land represents is: 
$700,000 / $1,000,000 = 0.7, or 70%. 
Similarly, the percentage of the fair market value that the building represents is: 
$300,000 / $1,000,000 = 0.3, or 30%. 
To allocate the purchase price of $800,000, we multiply each percentage by the purchase price: 
Land: 0.7 x $800,000 = $560,000 
Building: 0.3 x $800,000 = $240,000 
Therefore, the allocation of the purchase price is $560,000 to the land and $240,000 to the building.

On December 1,2017,Xeon Company Bought Land and an Accompanying Warehouse