Matchett Machinery Ltd. acquired a new site for its manufacturing operations. The company was able to find the ideal location in terms of lot size and highway access. Matchett paid $3.2 million to acquire the site. The bank, which was providing Matchett with the financing for the purchase, required that an appraisal be completed of the property. The appraisal report came back with the following estimated market values: land $1,800,000, building $1,080,000, and land improvements $120,000. Matchett explained, to the bank’s satisfaction, that it paid the $200,000 premium because of the savings it would realize from minimizing transportation distances given the site’s superior highway access.
Required:
Allocate the $3.2-million purchase price to the land, building, and land improvements. Also explain why this allocation process is necessary.