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17 January, 13:41

Industrial Metals purchases land, building, and equipment together for $1.2 million. The estimated fair values of the land, buildings, and equipment are $500,000, $800,000, and $200,000, respectively. What amount should be recorded in the separate account for the land?

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  1. 17 January, 14:17
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    The amount that should be recorded in the separate account for the land=$400,000

    Explanation:

    Step 1: Determine total fair value

    The expression for the total fair value is;

    Total fair value=land value+building value+equipment value

    where;

    land value=$500,00

    building value=$800,000

    equipment value=$200,000

    replacing;

    Total fair value = (500,000+800,000+200,000) = $1,500,000

    Total fair value=$1,500,000

    Step 2: Determine proportion of the total fair value that is land

    land proportion=land value/total fair value

    where;

    land value=$500,000

    total market value=$1,500,000

    replacing;

    land proportion=500,000/1,500,000=1/3

    Step 3: Determine cost assigned to the land

    Cost assigned to the land=land proportion*lump sum

    where;

    land proportion=1/3

    lump sum=$1,200,000

    replacing;

    Cost assigned to the land = (1/3) * 1,200,000=400,000

    Cost assigned to the land=$400,000

    The amount that should be recorded in the separate account for the land=$400,000
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