Question

27. If your company purchases land and a building for $100,000, and it intends to tear down the existing building to allow construction of a new warehouse, the purchase price should be allocated to the following accounts: A) $100,000 to the Construction Expense account B) $100,000 to the Land account and $0 to the Building account C) Prorated to the Land account and Building account based on the appraised values of each. D) $100,000 to the Building account and $0 to the Land account

Answer 1

The correct option is B) $100,000 to the Land account and $0 to the Building account.

Step-by-step explanation:

Originally, the $100,000 paid is for both land and a buildling. There would have been a need to prorate the $100,000 to the Land account and Building account based on the appraised values of each if the existing building was not tore down.

However, since the existing building was tore sown, that indicates the building was of no use to the company and only land is useful. This indicates that the $100,000 is paid for the land alone.

Therefore, the correct option is B) $100,000 to the Land account and $0 to the Building account.