Simpson and Homer Corporation began operations on January 1, 2006. On January 1, 2006, Simpson and Homer Corporation acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely furnished. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and furniture and fixtures, respectively. The initial values of the building, land, and furniture and fixtures would be:a) $1,300,000, $780,000, $520,000 b) $1,200,000, $720,000, $480,000 c) $ 720,000, $1,200,000, $480,000 d) None of these answer choices are correct.

b) $1,200,000, $720,000, $480,000

Explanation:

The independent appraisal forms a good basis for apportioning the total cost paid to each of the assets. In other words, the higher the appraisal fair value of the asset, the higher the actual cost apportioned.

Using the appraisal fair values as a ratio of building to land to furniture and fixtures,

$1,300,000 : $780,000 : $520,000

is equivalent to

5:3:2

Hence given that the actual price paid as a lump sum is $2,400,00

Building cost

= 5/10 × $2,400,000

= $1,200,000

Land cost

= 3/10 × $2,400,000

= $720,000

Furniture and fitting cost

= 2/10 × $2,400,000

= $480,000

answer; risk transference;