Tomassi Company paid $450,000 to acquire a piece of real estate consisting of land and an office building with a parking lot. In this situation:
A) The purchase price should be apportioned among the Land, Land Improvement, and Building accounts.
B) The entire purchase price should be debited to the Plant and Equipment account.
C) Land, Land Improvement, and Building accounts should each be debited for the respective appraisal value of each item.
D) Allocation of the entire $450,000 to Land results in an understatement of net income in the current and future accounting periods.

Question

Quizplus · Accepted Answer

The purchase price should be apportioned among the Land, Land Improvement, and Building accounts because each asset has a different useful life and depreciation rate. Allocating the entire cost to Plant and Equipment would result in an incorrect allocation of the cost among the assets. Allocating the cost based on appraised value is not appropriate unless the appraised values can be reasonably determined. Allocating the entire cost to land would result in an understatement of net income and an incorrect allocation of the cost.

Tomassi Company Paid $450,000 to Acquire a Piece of Real