Touch and Go Flight Academy acquired a new site for its training operations. The company was able to find a small unused airport with an updated runway and hangar that could be used to accommodate a flight simulator, small aircraft, and classrooms. The location was ideal as it was close to the city centre with a large population base from which to attract students. Touch and Go paid $6.5 million to acquire the site. Prior to providing financing for the purchase, the bank required that an appraisal be completed of the property. The evaluation appraisal report came back with the following estimated market values: land $3,410,000, building $2,480,000, and land improvements $310,000. Touch and Go management explained, to the bank’s satisfaction, that it paid the $300,000 premium because of the property’s proximity to the city centre and access to a large population base from which to draw students.

Required
Allocate the $6.5-million purchase price to the land, building, and land improvements. Also explain why this allocation process is necessary.