Makemore Company purchases a factory for $800,000. The purchase price is properly allocated 90% to the building and 10% to the land. In the first year, Makemore adds a storage shed to the building at a cost of $8,000. The utility company pays Makemore $1,500 for an easement to run utility lines across the land. A total depreciation of $45,000 is deducted over the 3 years. Determine the adjusted basis of the building and the land as of the end of year 3:
A)$728,000 building; $78,500 land
B)$683,000 building; $80,000 land
C)$683,000 building; $78,500 land
D)$728,000 building; $80,000 land

Question

Quizplus · Accepted Answer

Year 1: 
- Building: $800,000 x 90% = $720,000 (purchase price allocated to the building)
- Land: $800,000 x 10% = $80,000 (purchase price allocated to the land)
- Storage shed cost: $8,000 (added to the building)
Adjusted basis:
- Building: $720,000 + $8,000 = $728,000
- Land: $80,000

Year 2: No changes to the adjusted basis.

Year 3: 
- Depreciation: $45,000
- Easement payment: $1,500
Adjusted basis:
- Building: $728,000 - $45,000 = $683,000
- Land: $80,000 + $1,500 = $78,500

Therefore, the adjusted basis of the building is $683,000 and the adjusted basis of the land is $78,500 as of the end of year 3. The correct choice is C.

Makemore Company Purchases a Factory for $800,000