Question

Fox Realty purchased a residential property for $1,500,000. The latest available real estate assessment valued the property at $1,750,000 of which 20% was allocated to the land. How should record this acquisition on its books?

Answer 1

1. On purchase

Residential Property Purchase A/c	Dr	$1,500,000
Bank Account			Cr	$1,500,000

2.

The Cost Principle requires that the purchase has to be recorded at the price paid for the purchase and not at the Assessed Value.

3.

The cost of real estate has to be divided into the cost of land and cost of building as

A. Building is a depreciable asset.

B. Land is a non depreciable asset.

The latest assessment provides that 20% of the assessed value was allocated to land.

The proportionate value of Land in the consideration of $1,500,000 paid

=$1,500,000 X 20%

= $300,000

	Residential Property- Building A/c	Dr	$1,200,000
	Residential Property- Land A/c	Dr	$300,000
	Residential Property Purchase			Cr.	$1,500,000

Alternatively the enties may be passed combing both the entries without debiting the Residential Property Purchase a/c in Point 1.