Dorsey Co. has expanded its operations by purchasing a parcel of land with a building on it from Bibb Co. for $90,000. The appraised value of the land is $20,000, and the appraised value of the building is $80,000.
1. Assuming that the building is to be used in Dorsey Co.’s business activities, what cost should be recorded for the land?
2. Explain why, for income tax purposes, management of Dorsey Co. would want as little of the purchase price as possible allocated to land.
a. Land is a current asset
b. Land is not a depreciable asset.
c. Land value will not reduce taxable income.
d. Land is a depreciable asset.
e. Land value reduces taxable income.
The question belongs to Accounting and it discusses about calculation of cost of land and the reason for least price for land by the management of the company.
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