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 razed at a cost of $10,000 so the land can be used for employee parking, what cost should Dorsey Co. record for the land?
2. Explain why Dorsey Co. allocated the cost of assets acquired based on appraised values at the purchase date rather than on the original cost of the land and building to Bibb Co.
a. Appraised values are to be used because they represent the book value.
b. Appraised values are to be used because they represent the current asset values.
c. Appraised values are to be used because they represent the historical asset value.
The question belongs to Accounting and it discusses about recording the cost of land bought by a company.
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