Exercise 6-7 Basket purchase allocation LO 1 [The following information applies
ID: 2530478 • Letter: E
Question
Exercise 6-7 Basket purchase allocation LO 1 [The following information applies to the questions displayed below.] Dorsey Co. has expanded its operations by purchasing a parcel of land with a building on it from Bibb Co. for $87,000. The appraised value of the land is $28,000, and the appraised value of the building is $98,000. a. Assuming that the building is to be used in Dorsey Co.’s business activities, what cost should be recorded for the land? (Do not round your intermediate calculations.) b. Explain why, for income tax purposes, management of Dorsey Co. would want as little of the purchase price as possible allocated to land. (Select all that apply.) Land is a current asset Land is not a depreciable asset. Land value will not reduce taxable income. Land is a depreciable asset. Land value reduces taxable income.
Explanation / Answer
b. Land is not a depreciable Asset and Land value will not reduce taxable income.
a. Computation of Cost should be recorded for land Land = $28,000/($28,000+$98000)*$87000= $19333