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 Land account only.
C)Land,Land Improvement,and Building accounts should each be credited 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 component has a separate useful life and depreciation method. The land cannot be depreciated, the land improvements have a shorter useful life than the building, and the building has its own useful life and depreciation method. Allocating the entire purchase price to one account would result in an incorrect allocation of depreciation expense and an inaccurate representation of the asset's value on the balance sheet.

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