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    • CommentAuthorAcct 201
    • CommentTimeNov 6th 2009
     
    I have 3 questions on my homework that are similar and cannot figure them out. Can someone please help?

    Liltua Company pays $375,000 for real estate plus $20,100 in closing costs. The real estate consists of land appraised at $157,040; land improvements appraised at $458,890; and a building appraised at $176,670. Allocate the total costs among the three purchased assets and prepare the journal entry to record the purchase.

    A company paid $150,000, plus a 6% commission and $4,000 in closing costs for a property. The property included land appraised at $87,500, land improvements appraised at $35,000, and a building appraised at $52,500. What should be the allocation of this property;s costs in the company's accounting records?

    A) Land $75,000; Land Improvements; $30,000; Building, $45,000
    B) Land $75,000; Land Improvements; $30,800; Building, $46,200
    C) Land $81,500; Land Improvements; $32,600; Building, $48,900
    D) Land $79,500; Land Improvements, $32,600; Building, $47,700
    E) Land $87,500; Land Improvements; $35,000; Building, $52,500

    I came up with an answer for the last one but am not sure if I am correct. I would like to know the process to figure these out.
    Thanks!
    • CommentAuthorCounter
    • CommentTimeNov 6th 2009
     
    1. Compute the total cost. Cost includes all the costs necessary to get the assets ready for use.
    2. Allocate the cost in 1. to the three assets based on the appraised values.

    If effect you are using the appraised values as the means to divide up the actual cost among the three assets. If one asset has one-half of the total appraised values, it will be allocated one-half of the cost.
    • CommentAuthorAcct 201
    • CommentTimeNov 7th 2009
     
    Thank You for your help.
    • CommentAuthorAcct 201
    • CommentTimeNov 7th 2009
     
    On the first problem I came up with $158,152 for the land. Is that correct? I am not sure how to get the Land improvements cost and Building.
    • CommentAuthorCounter
    • CommentTimeNov 8th 2009
     
    On the first problem I say they had a total cost of $395,100 for three items. The three items had a total appraised value of $792,600. In other words, their cost was about one-half of the appraised value (actually 49.8486% of the appraised value). If the land's appraised value was $157,040 then the cost of the land would be approximately $78,282 (49.8486% X $157.040). Looking at it another way, the land's appraised value was $157,040 out of the total appraised value of $792,600. Therefore the land should get 19.81327% of the total cost = $78,282 (19.81327% X $395,100).



 

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