Question

A company buys a parcel of land on which are erected two buildings. The first building is a 100,000 square-foot warehouse and the second building is a 25,000 square-foot garage and maintenance building. The respective fair market values for the land, the warehouse, and the garage are $125,000, $200,000, and $75,000. The company paid $210,000 for all three assets. What amounts should be allocated to the land and the garage? Round your answers to the nearest whole number.

Answer 1

Land, $65,625 and Garage, $39,375

Step-by-step explanation:

The allocation would be done using the fair market values as basis. Fair market value is more appropriate as a basis instead of using the sizes of the building and the garage as basis.

Total fair market values = $125,000 + $200,000 + $75,000 = $400,000

Total amount paid for all assets = $210,000

Amount allocated to each asset =
`(asset's fair market value)/(total market value) *total amount paid for all assets`

Amount allocated to land =
`($125,000)/($400,000) *$210,000`

= $65,625

Amount allocated to warehouse =
`($200,000)/($400,000) *$210,000`

= $105,000

Amount allocated to garage =
`($75,000)/($400,000) *$210,000`

= $39,375