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Pinewood Company purchased two buildings on four acres of land. The lump-sum purchase price was $900,000. According to independent appraisals, the fair values were $450,000 (building A) and $250,000 (building B) for the buildings and $300,000 for the land. Required: Determine the initial valuation of the buildings and the land.

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Answer:

Buildings = $630,000

Land = $270,000

Explanation:

When a lump purchase price is given on buildings and land, the costs of Building and Land must be determined separately using fair values.

This is because Depreciation on Land and Building is different.

Buildings

Cost = (450,000+250,000)/ 1000,000 × $900,000

        = $630,000

Land

Cost = (300,000)/ 1000,000 × $900,000

        = $270,000

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