Laforge Cement Company Bought a Piece of Land with a Building

Essay

Laforge Cement Company bought a piece of land with a building on it for a total of $4,400,000. They obtained two appraisals to estimate the fair values of the land and building. $$\begin{array} { | l | r | r | } \hline & \text { Appraisal 1 } & \text { Appraisal 2 } \\\hline \text { Land } & \$ 1,200,000 & \$ 1,000,000 \\\hline \text { Building } & \$ 3,600,000 & \$ 4,000,000 \\\hline\end{array}$$ Required:
1. If management' s objectives are to minimize the amount of income tax they pay, which of the two appraisals should they use to allocate the purchase price? Explain your answer.
2. Based on your answer in part a calculate the amount to be allocated to the Land and the Building account.
3. Under what circumstances might management wish to use the other appraisal value ?