Accounting question

[thanu31]

hey im studying for my Intermediate accounting exam :bang

Just need a quick answer to this

In December 2010 Belinda Ltd. purchased a building and the land it was on for $25,000,000. Independent valuations of the land and building range from:
$9 million and $14 million for the land and
$11 million and $17 million for the building.

Legal and other costs associated with the purchase was an additional $1 million.

Account for the purchase.


Would you account for them based on objectives? Like u want to keep depreciation low, so you account $14mill for land and $11mill for building?

or is there another way that this is supposed to be doing this..

Thanks in advance

[Hyperion]

Yea you always want to keep the depreciation low, that way you can buy low, sell high. Make mula $$$.

[m_bisson]

What does account for the purchase mean? I'm just curious :P

[ovie8]

or your objective could be to increase net income. So you want to increase depreciation expense to offset the revenue.

Is this the entire question?? or is there more to it??

[thanu31]

or your objective could be to increase net income. So you want to increase depreciation expense to offset the revenue.

Is this the entire question?? or is there more to it??

how does increasing the expense higher net income?

it is the entire question, but i think its more of a discussion type question

[ovie8]

Sorry my bad...I am studying for my own accounting test for this sat..so my head is spinning...lol...

since building is a depreciating asset, it would be better to capitalize as much as you can on Land to improve the statement of financial position....


I am working on accounting for income taxes...so I was think in regards to lowering net income....but still my last comment would have been wrong because depreciation is added back to net income for taxation purposes...nothing really to do with this but...yeah...lol

[aZuMi]

You can look at it in two ways. The first way is the obvious way: increasing net income. By having lower amortization, the income increases. However, there's another way of looking at it.

First, ask this question - what is the organization's basis for performance? EBITDA? Net Income? Gross Sales? Gross Margin?

Many companies base their performance with EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) - which means depreciation is not a factor of performance. That said, what does depreciation impact? ----> taxes. Increase depreciation. It may lower Income --> but it also lower the taxes you pay to the government. Less taxes paid to the government = more cashflow to the company and more in the company's pocket.

Lastly - when all is said and done, it's an impact in your balance sheet and income statement, but you save a hell of a lot of money by not paying for taxes.

[thanu31]

What does account for the purchase mean? I'm just curious :P

basically how you would treat it, what are the figures, and what are they going towards

[thanu31]

thanks guys, definitely helping me

and goodluck on ur exam, i have it saturday too