Final answer:
When a company buys land and a building, it is important to split the cost between the two for financial reporting purposes. Land is considered a non-depreciable asset, while buildings have a limited useful life and their value decreases over time. Splitting the cost allows the company to accurately track depreciation of the building and exclude the land from depreciation calculations.
Step-by-step explanation:
In accounting, when a company buys land and a building, it is important to split the cost between the land and the building for financial reporting purposes. The reason for this is that land is considered a non-depreciable asset, meaning its value does not decrease over time. On the other hand, buildings have a limited useful life and their value decreases over time due to wear and tear. By splitting the cost, the company can accurately track the depreciation of the building and exclude the land from depreciation calculations.
Let's take an example: If the company bought land and a building for $128,000, and the land is valued at $28,000 and the building is valued at $100,000, the company would allocate $28,000 towards the land and $100,000 towards the building. This allocation allows the company to accurately record the value of each asset and calculate depreciation expenses for the building.