debits and credits???

Question

a company purchases land and a building on the land for a total of 1,000,000 . The fair market values of the land and building are 300,000 and 900,000, respectively. the land and building should be recorded at

500,000 each
300,000 and 900,000 respectively
250,000 and 750,000 respectively
600,000 each
333,333 and 666,667 respectively

this is confusing the hell out of me ??

Answer 1

I say 250,000 and 750,000 because you have to record only what the purchase was - not what the market value is. 300,000 is 25% of the total value of 1,200,000 so 25% of 1,000,000 would be 250,000.

In financial accounting you don't record appreciation in buildings and land until the building is sold. This is a purchasing problem - the total value of the transaction is $1,000,000 so that is what has to be recorded.

Answer 2

In this case, you will record what was spent. In this case, the market value doesnt influence what is recorded, since the land and building are not being sold. Now, when they say 300,000 and 900,000 respectively, they mean the land is currently worth 300,000 and the building is currently worth 900,000. This helps us identify the ratio between these two assets. The buiding is worth 3 times as much as the land. The ratio would be 1/3 respectively. When you take a look at your options, you want to keep in mind that 1 to 3 ratio, while remembering that you want a total of 1,000,000.

250,000 and 750,000 respectively would be the correct answer. With this choice, the building is worth 3 times as much as the land, they add up to 1,000,000. And also, they are close to the fair market value.

Answer 3

900,000 Building Value?
The building will accumulate depreciation.

300,000 Land value ?
Land does not depreciate on the books, unless real estate drops in value, and as an asset is reduced.

Answer 4

250,000 and 750,000 its just the ratio of the value of the land applied to the 1,000,000