A company purchased property for $100,000. The property included a building, a parking lot, and land. The building was appraised at $57,500; the land at $48,600, and the parking lot at $18,900. Land should be recorded in the accounting records with an allocated cost of:

To determine the allocated cost of the land, we need to use the appraised values to figure out the percentage of the total purchase price each component (building, parking lot, and land) represents. Then, we apply those percentages to the total purchase price to get the allocated cost for each component.

Here's how you do it:

1. Add up the appraised values to get the total appraised value: Building: $57,500 Land: $48,600 Parking Lot: $18,900 Total Appraised Value: $57,500 + $48,600 + $18,900 = $125,000

2. Calculate the percentage of the total appraised value each component represents: Building's Percentage: $57,500 / $125,000 Land's Percentage: $48,600 / $125,000 Parking Lot's Percentage: $18,900 / $125,000

3. Apply these percentages to the total purchase price to find out the allocated cost: Building's Allocated Cost: $100,000 * ($57,500 / $125,000) Land's Allocated Cost: $100,000 * ($48,600 / $125,000) Parking Lot's Allocated Cost: $100,000 * ($18,900 / $125,000)

Now let's calculate the land's allocated cost:

Land's Percentage of Total Appraisal: $48,600 / $125,000 = 0.3888 (or 38.88%) Land's Allocated Cost: $100,000 * 0.3888 = $38,880

Thus, the allocated cost of the land should be recorded in the accounting records as $38,880.

Extra: In accounting, the cost allocation of a bundled purchase like this is essential for properly reflecting the value of assets on a company's balance sheet. When a company purchases property that includes various assets, the cost needs to be allocated to those individual assets based on their relative fair market values or appraisals. The reason this is important is that each type of asset might have a different depreciation rate or may not depreciate at all (land typically does not depreciate), which affects financial statements and tax calculations.

The land, building, and parking lot all have different uses and are considered separate assets. While buildings and parking lots depreciate over time due to wear and tear, land does not. That means the land's value will remain consistent on the balance sheet while the building and parking lot values will decrease due to depreciation, impacting the net worth of the company over time.

Understanding how to allocate costs correctly is crucial in accounting because it ensures that financial reporting is accurate and complies with accounting standards. It also provides a more accurate picture of a company’s asset values for investors, creditors, and for the company’s management for internal decision-making.