Question

Jamison Company purchased the assets of Booker Company at an auction for $2,800,000. An independent appraisal of the fair value of the assets is listed below:

Land $950,000
Building 1,400,000
Equipment 1,050,000
Trucks 1,700,000
Assuming that specific identification costs are impracticable and that Jamison allocates the purchase price on the basis of the relative fair values, what amount would be allocated to the Building?
A) $2,550,000
B) $768,627
C) $1,059,460
D) $1,400,000

Answer 1

The purchase price allocated to the Building is calculated by finding the proportion of the Building's fair value relative to the total fair value of all assets and then applying that percentage to the purchase price. The correct allocation amount for the Building is $768,627.

Step-by-step explanation:

The student is asking how to allocate the purchase price of a set of assets to the individual assets based on their relative fair values when specific identification costs are impracticable. This is a common issue in accounting, particularly in relation to business combinations or asset acquisitions. To calculate the amount allocated to the Building, we first need to determine the total fair value of all assets, which is $950,000 (Land) + $1,400,000 (Building) + $1,050,000 (Equipment) + $1,700,000 (Trucks) = $5,100,000. The proportion of the total fair value that the Building represents is $1,400,000 / $5,100,000, which simplifies to approximately 27.45%. We then apply this proportion to the purchase price of $2,800,000: $2,800,000 * 27.45% = $768,627.

Therefore, the amount allocated to the Building is $768,627, which corresponds to option B.