Question

Sparky Tourism purchased a new building, land and all the related interior furnishings for $250,000. The fair value of each, if purchased separately would be as follows: Land: $150,000, Building: $100,000, Furnishings: $75,000

Explain how the assets should be reflected on the books and why?

Calculate how much should be assigned to each independent asset.

  

Answer 1

• The assets should be reflected in the books at the cost at which they are acquired. Since a lumpsum amount is paid for various assets, the cost incurred will have to be assigned to each independent assets.
• Such assigning of cost will be based on the Fair Value amount of each assets.
• Amount Assigned to each asset will be equal to [(Cost to be assigned x Fair Value of that asset)/Total Value of Fair Values of all assets]
• Calculation of values to be assigned to each independent assets:

Assets	Fair Value	Amount to be allocated	Amount assigned to each asset
	[A]	[B = $ 250,000]	[C = (B x A)/$325,000]
Land	$                           150,000.00	$             250,000.00	$                   115,384.62
Building	$                           100,000.00	$             250,000.00	$                     76,923.08
Furnishings	$                             75,000.00	$             250,000.00	$                     57,692.31
TOTAL	$                           325,000.00		$                   250,000.00