Question

A company paid $150,000, plus a 7% commission and $5,000 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?

Answer 1

$115,850 (70%*$165,500) is the cost for the land and $49,650 (30%*$165,500) represents the cost for the building. The total cost for the land and the building is represented by the equation $165,500 (150,000 + [7%*$150,000] + $5000). The company must gain (70% and 30%) by dividing each of the values by the total value (($87,500+$35,000)/($87,500+$35,000+$52,500)for land; $52,500/($87,500+$35,000+$52,500) for building.