Question

A company acquired an office building on three acres of land for a lump-sum price of $3,150,000. the building was completely furnished. according to independent appraisals, the fair values were $2,240,000, $2,800,000, and $560,000 for the building, land, and furniture, respectively. the initial values of the building, land, and furniture would be: building land furniture

a. $ 2,240,000 $ 2,800,000 $ 560,000
b. $ 1,260,000 $ 1,575,000 $ 315,000
c. $ 1,575,000 $ 1,260,000 $ 315,000
d. none of the other answer choices are correct.

Answer 1

The initial values of the building, land, and furniture acquired by the company are $1,260,000 for the building, $1,575,000 for the land, and $315,000 for the furniture, based on the relative fair value allocation of the total purchase price of $3,150,000. The correct answer is option b.

Step-by-step explanation:

To allocate the lump-sum purchase price to the individual assets acquired, we need to distribute the total cost of $3,150,000 based on the relative fair values of the building, land, and furniture.

Using the fair values of $2,240,000 for the building, $2,800,000 for the land, and $560,000 for the furniture, the sum of the fair values is $5,600,000. The initial values are found by dividing the individual fair values by the summed fair value and then multiplying each by the total purchase price.

Allocation for the building: ($2,240,000 / $5,600,000) × $3,150,000 = $1,260,000.
Allocation for the land: ($2,800,000 / $5,600,000) × $3,150,000 = $1,575,000.
Allocation for the furniture: ($560,000 / $5,600,000) × $3,150,000 = $315,000.

Therefore, the initial values of the building, land, and furniture would be $1,260,000, $1,575,000, and $315,000 respectively. The correct answer is (b).