Question

5. Infinity Company purchased an abandoned property with the intention of building a new one. The costs associated with the property were:

Purchase price	$	195,000
Real estate commissions		15,000
Legal fees		700
Expenses of clearing the land		2,000
Expenses to remove old building		4,000

What portion of these costs should be allocated to the cost of the land and what portion should be allocated to the cost of the new building?

Select one:

a. $195,000 to Land; $21,700 to Building

b. $197,700 to Land; $19,000 to Building

c. $210,700 to Land; $6,000 to Building

d. $216,700 to Land; $0 to Building

e. $210,000 to Land; $6,700 to Building

6. Riverboat Adventures pays $300,000 plus $15,000 in closing costs to buy out a competitor. The real estate consists of land appraised at $35,000, a building appraised at $105,000, and paddleboats appraised at $210,000. Compute the cost that should be allocated to the land.

Select one:

a. $140,000

b. $32,500

c. $35,000

d. $31,500

e. $93,000

Answer 1

5.

Total cost allocated to land:

Purchase price	$195,000
Real estate commission	15,000
Legal fees	700
Expenses of clearing the land	2,000
Expenses to remove old building	4,000
Total cost allocated to land	$216,700

Total cost allocated to building $0

Hence option d is correct.

6.

Cost allocated to land = $35,000 * [($300,000+15,000) / ($35,000+105,000+210,000)]

Cost allocated to land = $35,000 * ($315,000 / 350,000)

Cost allocated to land = $31,500

Hence option d is correct