Langford Company Bought a Piece of Land with a Building

question 11

Essay

Langford Company bought a piece of land with a building on it for a total of $4,400,000. They hired two companies to estimate the fair values of the land and building. The first estimate was: Land $1,200,000, Building $3,600,000. The second appraisal was: Land $1,000,000 and Building $4,000,000.
Instructions
a) 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? Support your answer.
b) Based on your answer in part a, calculate the amount to be allocated to the Land and the Building account.
c) Under what circumstances might management use the other appraisal value?

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Definitions:

Prejudice

A preconceived opinion that is not based on reason or actual experience.

Hindsight Bias

The inclination to believe, after an event has occurred, that one would have predicted or expected the outcome.

Stereotype

A widely held but oversimplified and generalized belief about a particular category of people or things.

Negative Emotion

Emotional states considered to be unpleasant or harmful, such as sadness, anger, fear, and jealousy.