Question

In January 2018, the Paper Division of Dunder Mifflin Inc. purchased a piece of property in Scranton, Pennsylvania for $475,000. Other fees associated with the purchase, including closing costs and realtor commissions, totaled $25,000. The property contains land, a warehouse, and equipment. The Vice President of the Paper Division, Andy Bernard, and the Chief Financial Officer of Dunder Mifflin, Oscar Martinez, are discussing how the cost of the property should be allocated to the items purchased. The VP of the Paper Division, Andy Bernard, wants to allocate most of the cost to the land, while the CFO argues that they should allocate the bulk of the purchase cost to the equipment and warehouse because “no one wants property in Scranton.” Assume that the same depreciation methods are used for financial reporting and tax purposes, and tax rates won’t change over the next 5 years. Andy Bernard is hoping to be promoted to the VP of the Printer Division, which is a much larger division than the Paper Division. A key determinant of whether Bernard will be promoted is the profitability of the Paper Division over the next two years.

Question: What is your recommendation for allocating the purchase costs to the assets? (6 pts.)

Answer 1