Sandhill Farms purchased real estate for $1,160,000, which included $4,800 in legal fees. It paid $257,000 cash and incurred a mortgage payable for the balance. The real estate included land that was appraised at $496,540, a building appraised at $724,680, and fences and other land improvements appraised at $120,780. The building has an estimated useful life of 60 years and a $48,000 residual value. Land improvements have an estimated 15-year useful life and no residual value.

(a)

Calculate the cost that should be allocated to each asset purchased.

Land

$

Building

$

Land Improvements

$

To allocate the cost of each asset (land, building, and land improvements), we need to use the **appraised values** as a basis for proportionally dividing the total cost of the purchase (excluding legal fees).

The steps are:

1. **Determine the total appraised value**:
   \[
   \text{Total Appraised Value} = \text{Land Appraisal} + \text{Building Appraisal} + \text{Land Improvements Appraisal}
   \]
   \[
   \text{Total Appraised Value} = 496,540 + 724,680 + 120,780 = 1,341,000
   \]

2. **Find the proportion for each asset**:
   \[
   \text{Proportion of Land} = \frac{\text{Land Appraisal}}{\text{Total Appraised Value}} = \frac{496,540}{1,341,000}
   \]
   \[
   \text{Proportion of Building} = \frac{\text{Building Appraisal}}{\text{Total Appraised Value}} = \frac{724,680}{1,341,000}
   \]
   \[
   \text{Proportion of Land Improvements} = \frac{\text{Land Improvements Appraisal}}{\text{Total Appraised Value}} = \frac{120,780}{1,341,000}
   \]

3. **Allocate the total purchase cost** ($1,160,000) to each asset (excluding the $4,800 legal fees)**:
   \[
   \text{Allocated Cost of Land} = \text{Proportion of Land} \times (\text{Total Purchase Cost} - \text{Legal Fees})
   \]
   \[
   \text{Allocated Cost of Building} = \text{Proportion of Building} \times (\text{Total Purchase Cost} - \text{Legal Fees})
   \]
   \[
   \text{Allocated Cost of Land Improvements} = \text{Proportion of Land Improvements} \times (\text{Total Purchase Cost} - \text{Legal Fees})
   \]

Let me calculate each value.The costs allocated to each asset are as follows:

- **Land**: \$427,424
- **Building**: \$623,808
- **Land Improvements**: \$103,968

These values are based on the appraised proportions of each asset relative to the total purchase price.

Would you like further details on how these numbers were calculated or have any questions?

Here are some related questions for deeper understanding:

1. How are appraised values used in real estate accounting?
2. What is the significance of excluding legal fees from asset allocation?
3. How does the useful life of a building affect its depreciation?
4. Why do land improvements typically have a shorter useful life compared to buildings?
5. What is the residual value, and why is it important in depreciation calculations?

**Tip**: When calculating depreciation, remember that land is not depreciated, while buildings and land improvements are.

Sandhill Farms purchased real estate for $1,160,000, which included $4,800 in legal fees. It paid $257,000 cash and incurred a mortgage payable for the balance. The real estate included land that was appraised at $496,540, a building appraised at $724,680, and fences and other land improvements appraised at $120,780. The building has an estimated useful life of 60 years and a $48,000 residual value. Land improvements have an estimated 15-year useful life and no residual value.

(a) Calculate the cost that should be allocated to each asset purchased.

Land
$

Building
$

Land Improvements
$

Learn how to allocate the total purchase cost of real estate, which includes land, building, and land improvements, based on appraised values. The step-by-step solution covers proportional allocation and real estate accounting concepts. Suitable for college-level accounting students.

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