How to Allocate Purchase Price for Land, Building, and Equipment – Importance of Fair Value in Accurate Recording of Transactions and Proper Accounting Treatment

If land, building, and equipment are acquired in a lump-sum purchase, the purchase price is allocated first based on the fair value of the building and then the fair value of the equipment, with any residual allocated to the land.

False

When a lump-sum purchase is made for land, building, and equipment, it becomes necessary to allocate the purchase price to each of the assets acquired. This is because each asset has a different fair value and it is important to record the transactions accurately.

The allocation of the purchase price is usually based on the fair values of the assets acquired. In this case, the purchase price is allocated first to the building, then to the equipment, and finally to the land. This is because the fair value of the building and equipment can often be determined more easily than the fair value of land.

To determine the fair value of the building and equipment, an appraiser may be used to assess their value. Once these values have been determined, the purchase price can be allocated based on those values. If the purchase price is higher than the combined fair value of the building and equipment, any residual amount is allocated to the land.

For example, let’s say a company purchases a piece of property for $1,000,000. An appraiser determines that the fair value of the building is $500,000 and the fair value of the equipment is $200,000. In this case, the purchase price is allocated first to the building based on its fair value of $500,000. The remaining value of $500,000 is then allocated to the equipment based on its fair value of $200,000. This leaves a residual amount of $300,000 that is allocated to the land.

In conclusion, when a lump-sum purchase of land, building, and equipment is made, it is important to allocate the purchase price based on the fair value of each asset acquired. This ensures accurate recording of the transaction and proper accounting treatment for each asset.

More Answers: