Pinewood Company purchased two buildings on four acres of land. The lump-sum purchase price was $2,400,000. According to independent appraisals, the fair values were $1,125,000 (building A) and $500,000 (building B) for the buildings and $875,000 for the land.Required:Determine the initial valuation of the buildings and the land.
Question
Pinewood Company purchased two buildings on four acres of land. The lump-sum purchase price was 1,125,000 (building A) and 875,000 for the land.Required:Determine the initial valuation of the buildings and the land.
Solution
To determine the initial valuation of the buildings and the land, we need to allocate the lump-sum purchase price based on the fair values of the buildings and the land.
Here are the steps:
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First, calculate the total fair value of the buildings and the land.
Total Fair Value = Fair Value of Building A + Fair Value of Building B + Fair Value of Land Total Fair Value = 500,000 + 2,500,000
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Next, calculate the proportion of the total fair value that each component represents.
Proportion of Building A = Fair Value of Building A / Total Fair Value Proportion of Building A = 2,500,000 = 0.45
Proportion of Building B = Fair Value of Building B / Total Fair Value Proportion of Building B = 2,500,000 = 0.20
Proportion of Land = Fair Value of Land / Total Fair Value Proportion of Land = 2,500,000 = 0.35
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Finally, allocate the lump-sum purchase price based on these proportions.
Initial Valuation of Building A = Lump-Sum Purchase Price * Proportion of Building A Initial Valuation of Building A = 1,080,000
Initial Valuation of Building B = Lump-Sum Purchase Price * Proportion of Building B Initial Valuation of Building B = 480,000
Initial Valuation of Land = Lump-Sum Purchase Price * Proportion of Land Initial Valuation of Land = 840,000
So, the initial valuation of Building A is 480,000, and the land is $840,000.
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