Understanding Asset Purchase Price Basis Allocation

Question:

Because of the seller’s desire to quickly sell out and retire, Tony is able to purchase a land and warehouse for $2,500,000. At full fair value, the land would have been worth $600,000; and the warehouse would have been worth $2,400,000. How much of Tony’s purchase price basis is allocated to each asset?

Answer:

Tony's purchase price basis is allocated as $500,000 to the land and $2,000,000 to the warehouse. Based on the information provided, the correct allocation is as follows: - $600,000 to the land - $1,900,000 to the warehouse

Understanding Asset Purchase Price Basis Allocation

Asset Purchase Price Basis Allocation refers to the distribution of the total purchase price of an asset between its different components or elements. In this case, Tony purchased a land and a warehouse for $2,500,000. However, the full fair value of the land was $600,000, and the warehouse was valued at $2,400,000.

Calculation of Allocation:

To determine how much of Tony's purchase price basis is allocated to each asset, we need to calculate the percentage of the total fair value represented by each asset.

For the land: ($600,000 / $3,000,000) * $2,500,000 = $500,000

For the warehouse: ($2,400,000 / $3,000,000) * $2,500,000 = $2,000,000

Therefore, based on the calculations, the correct allocation is $500,000 to the land and $2,000,000 to the warehouse.

In conclusion, Tony's purchase price basis is allocated as $500,000 to the land and $2,000,000 to the warehouse.