In Class Solution Bmgt 417

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Chapter 9
Property Acquisition and Cost Recovery

McGraw-Hill Connect Homework Answers

40. [LO 1] Emily purchased a building to store inventory for her business. The purchase price was $760,000. Beyond this, Emily incurred the following necessary expenses to get the building ready for use: $10,000 to repair the roof, $5,000 to make the interior suitable for her finished goods, and $300 in legal fees. What is Emily’s cost basis in the new building?

$765,300 cost basis, computed as follows:
| |Amount |Explanation | | | | | |Description | | | |Purchase price |$760,000 | | |Improvements |5,000 |Business preparation costs | |Legal fees | 300 |Business preparation costs | |Cost basis in building |$765,300* | |

*Note that the $10,000 repair for the roof was not capitalized. The repair is likely a routine maintenance expenditure rather than a capitalized cost. However, if the expense improved or prolonged the life of the asset beyond what would be considered maintenance to keep it in its working condition, it would be capitalized.

45. [LO 1] Wanting to finalize a sale before year-end, on December 29, WR Outfitters sold to Bob a warehouse and the land for $125,000. The appraised fair market value of the warehouse was $75,000, and the appraised value of the land was $100,000.

a. What is Bob’s basis in the warehouse and in the land? b. What would be Bob’s basis in the warehouse and in the land if the appraised value of the warehouse is $50,000, and the appraised value of the land is $125,000? c. Which appraisal would Bob likely prefer?

NOTE: This is a bargain purchase. The sales price is less than the appraised value. This solution uses the relative appraised values of the land and the warehouse to allocate the purchase price between these two assets.

a. Bob’s cost basis in the land is $71,429. Because the purchase price is less than the appraised values for the land and the warehouse, the purchase price must be allocated between the land and the warehouse. The $71,429 basis for the land is the amount of the $125,000 purchase price that is allocated to the land based on the relative value of the land ($100,000) to the value of the land ($100,000) plus the value of the warehouse ($75,000) based on the appraisal. The formula used to determine the basis allocated to the land is $125,000 (purchase price) x $100,000/($100,000 + 75,000). Use the same process to determine that Bob’s basis in the warehouse is $53,571.

b. Bob’s cost basis for the land is $89,286. Because the purchase price is less than the appraised values for the land and the warehouse, the purchase price must be allocated between the land and the warehouse. The $89,286 basis for the land is the amount of the $125,000 purchase price that is allocated to the land based on the relative value of the land ($125,000) to the value of the land ($125,000) plus the value of the warehouse ($50,000) based on the appraisal. The formula used to determine the basis allocated to the land is $125,000 (purchase price) x $125,000/($50,000 + 125,000). Use the same process to determine that Bob’s basis in the warehouse is $35,714.

c. Bob would likely prefer the appraisal from part (a), because the appraisal allows him to allocate more basis to the warehouse, which is depreciable.

47. [LO 2] DLW Corporation acquired...
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