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Allocating Purchase Price Between Land and Building (and Other Assets)

When purchasing assets like land and a building together for a lump sum, it's crucial to allocate the purchase price between them. This is because land is generally not depreciable, while buildings are. Accurate allocation is essential for calculating depreciation expense for tax and accounting purposes. The same principle applies to other assets purchased as a package.

The Problem

You purchase land and a building for a total of ₹210 lakhs. You need to determine how much of that cost should be attributed to the land and how much to the building. An independent appraisal values the land at ₹80 lakhs and the building at ₹160 lakhs. The total appraised value is ₹240 lakhs, which is higher than your purchase price of ₹210 lakhs.

The Solution: Proportional Allocation

Since you bought the assets for less than their appraised value, you need to allocate the cost proportionally based on their relative appraised values.

  1. Calculate the Ratio: Determine the ratio of the appraised values of the land and building. In this case, the ratio is 80:160, which simplifies to 1:2. This means the building's appraised value is twice that of the land.

  2. Apply the Ratio to the Purchase Price: Use this ratio to split the actual purchase price.

  3. Total Ratio Parts: 1 (land) + 2 (building) = 3 parts

  4. Land Allocation: (1/3) * ₹210 lakhs = ₹70 lakhs

  5. Building Allocation: (2/3) * ₹210 lakhs = ₹140 lakhs

Therefore, ₹70 lakhs is allocated to the land, and ₹140 lakhs is allocated to the building.

Another Example: Computer and Printer

The same principle applies to other assets purchased together. Consider buying a computer and a printer.

  • Quoted Price (Computer): ₹80,000
  • Quoted Price (Printer): ₹20,000
  • Total Quoted Price: ₹100,000

  • Actual Purchase Price (Both): ₹90,000

  • Calculate the Ratio: The ratio of the quoted prices is 80,000:20,000, which simplifies to 4:1.

  • Apply the Ratio to the Purchase Price:

  • Total Ratio Parts: 4 (computer) + 1 (printer) = 5 parts

  • Computer Allocation: (4/5) * ₹90,000 = ₹72,000

  • Printer Allocation: (1/5) * ₹90,000 = ₹18,000

Therefore, ₹72,000 is allocated to the computer, and ₹18,000 is allocated to the printer.

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