Maple Manufacturing Company recently purchased a property for use as a manufacturing facility. The company paid $850,000 for a building and four hectares of land. When recording the purchase, the company's accountant allocated $750,000 of the total cost to the building and the remaining $100,000 to the land.
After some investigation and an independent appraisal, you determine that the building is deemed to have a value of only $435,000. You also discover that the property is located near a major highway providing excellent access for shipping, and is therefore quite valuable. Similar properties in the area have been selling for $125,000 per hectare.
Maple Manufacturing is a very successful company and has traditionally reported very high net earnings. Last year, the company paid more than $200,000 in income taxes.
Required:
a. Determine the appropriate allocation between the buildings and land accounts for this basket purchase. (Remember that four hectares of land were purchased.)
b. Why would the company's accountant have wanted to allocate most of the purchase cost to the building rather than to the land?