{"id":40060,"date":"2025-06-27T13:04:09","date_gmt":"2025-06-27T13:04:09","guid":{"rendered":"https:\/\/gaviki.com\/blog\/?p=40060"},"modified":"2025-06-27T13:04:10","modified_gmt":"2025-06-27T13:04:10","slug":"on-1-july-2022-wow-purchased-land-and-a-building-for-a-lump-sum-payment-of-400000","status":"publish","type":"post","link":"https:\/\/gaviki.com\/blog\/on-1-july-2022-wow-purchased-land-and-a-building-for-a-lump-sum-payment-of-400000\/","title":{"rendered":"On 1 July 2022, WOW purchased land and a building for a lump sum payment of $400,000"},"content":{"rendered":"\n<p>On 1 July 2022, WOW purchased land and a building for a lump sum payment of $400,000. An individual expert valued the land at $150,000 and the building at $300,000. The land is not depreciable. The building is estimated to have a 20-year useful life with no residual value. A reducing balance method at a 10% annual depreciation rate is used for the building depreciation.<\/p>\n\n\n\n<p><strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">The correct answer and explanation is:<\/mark><\/strong><\/p>\n\n\n\n<p><strong>Correct Answer:<\/strong><\/p>\n\n\n\n<p>To allocate the $400,000 purchase price between the land and building:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Total valuation by expert = $150,000 (land) + $300,000 (building) = $450,000<\/li>\n\n\n\n<li>Land allocation = ($150,000 \/ $450,000) \u00d7 $400,000 = $133,333.33<\/li>\n\n\n\n<li>Building allocation = ($300,000 \/ $450,000) \u00d7 $400,000 = $266,666.67<\/li>\n<\/ul>\n\n\n\n<p><strong>Depreciation for Building using Reducing Balance Method:<\/strong><\/p>\n\n\n\n<p>Year 1 depreciation (2022\u20132023) = 10% \u00d7 $266,666.67 = $26,666.67<br>Book value at end of Year 1 = $266,666.67 \u2212 $26,666.67 = $240,000.00<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><strong>Explanation (300 words):<\/strong><\/p>\n\n\n\n<p>When a lump sum is paid to acquire both land and a building, the total cost must be allocated proportionally based on their individual appraised values. This ensures the correct accounting treatment, especially since land is not depreciable and the building is.<\/p>\n\n\n\n<p>The total appraised value of both assets is $450,000. The valuation assigns $150,000 to the land and $300,000 to the building. To allocate the $400,000 purchase price correctly, calculate the ratio of each component to the total appraised value. The land\u2019s ratio is 1\/3 and the building\u2019s is 2\/3. Applying these ratios to the actual purchase price, the land is allocated $133,333.33, and the building is allocated $266,666.67.<\/p>\n\n\n\n<p>Since land is not depreciated, only the building is subject to depreciation. The building has a useful life of 20 years with no residual value, and the reducing balance method is applied at a 10% annual rate. This method means each year\u2019s depreciation is based on the book value at the start of the year, not the original cost.<\/p>\n\n\n\n<p>For the first year, 10% of the initial building value ($266,666.67) is calculated, resulting in $26,666.67 of depreciation expense. This amount is subtracted from the book value, giving a new book value of $240,000 for the beginning of the next year.<\/p>\n\n\n\n<p>This approach matches depreciation expense more closely with the asset\u2019s decreasing value and provides a conservative method of recognizing expenses over the asset\u2019s life.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>On 1 July 2022, WOW purchased land and a building for a lump sum payment of $400,000. An individual expert valued the land at $150,000 and the building at $300,000. The land is not depreciable. The building is estimated to have a 20-year useful life with no residual value. A reducing balance method at a [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-40060","post","type-post","status-publish","format-standard","hentry","category-quiz-questions"],"_links":{"self":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/40060","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/comments?post=40060"}],"version-history":[{"count":1,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/40060\/revisions"}],"predecessor-version":[{"id":40062,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/40060\/revisions\/40062"}],"wp:attachment":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/media?parent=40060"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/categories?post=40060"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/tags?post=40060"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}