Brenda purchased a business for $120,000 and received a building, FMV $80,000; l
ID: 2334766 • Letter: B
Question
Brenda purchased a business for $120,000 and received a building, FMV $80,000; land, FMV $10,000; and furniture and fixtures, FMV $30,000. She spent $10,000 on legal fees to make the purchase. What is the basis of these items? $82,500 building; $12,500 land; $35,000 furniture and fixtures. $88,750 building; $11,250 land; $30,000 furniture and fixtures. $80,000 building; $10,000 land; $30,000 furniture and fixtures. $86,667 building; $10,833 land; $32,500 furniture and fixtures. Brenda purchased a business for $120,000 and received a building, FMV $80,000; land, FMV $10,000; and furniture and fixtures, FMV $30,000. She spent $10,000 on legal fees to make the purchase. What is the basis of these items?Explanation / Answer
Answer: $86,667 building; $10,833 land; $32,500 furniture and fixtures.
The total purchase consideration is $120,000. But amount paid is increased by $10,000 paid for legal fees. This fees are not incurred on the day to day activities of the firm. The legal fees must be added to the value of the assets purchased on a pro-rata basis to each type of asset acquired.
Legal cost allocated to Building = 10,000 * (80,000/ 120,000) = 6,667
Legal cost allocated to Land = 10,000 * (10,000/ 120,000) = 833
Legal cost allocated to Furniture and Fixtures = 10,000 * (30,000/ 120,000) = 2,500