Question

Land, buildings, and equipment are acquired for a lump sum of $950,000. The fair values of the three assets are respectively, $200,000, $500,000, and $300,000. What is the cost assigned to the building?

a) $475,000
b) $555,556
c) $500,000
d) $190,000

Answer 1

The cost assigned to the building is $475,000, calculated by taking the total purchase price and allocating it based on the proportion of the fair value that the building represents relative to the combined fair value of all three assets.

Step-by-step explanation:

The cost assigned to the building when land, buildings, and equipment are acquired for a lump sum of $950,000, and the fair values are $200,000, $500,000, and $300,000 respectively, is determined by allocating the total cost based on the fair value proportion of each asset. The calculation is as follows:

• Total fair value of assets = Land ($200,000) + Buildings ($500,000) + Equipment ($300,000) = $1,000,000.
• Proportion of the total fair value that the building represents = Building's fair value / Total fair value = $500,000 / $1,000,000 = 50%.
• Cost assigned to the building = Total cost x Proportion of building = $950,000 x 50% = $475,000.

Therefore, the cost assigned to the building is $475,000 (option a).