Reference no: EM132783162

In November of 2020, the Paper Division of Dunder Mifflin Inc. purchased a piece of property in Scranton, Pennsylvania for $475,000. Other fees associated with the purchase, including closing costs and realtor commissions, totaled $25,000. The property contains land, a warehouse, and equipment. The Vice President of the Paper Division, Andy Bernard, and the Chief Financial Officer of Dunder Mifflin, Oscar Martinez, are discussing how the cost of the property should be allocated to the items purchased. The VP of the Paper Division, Andy Bernard, wants to allocate most of the cost to the land (80% to land and 20% to equipment and warehouse), while the CFO argues that they should allocate the bulk of the purchase cost to the equipment and warehouse (80% equipment & warehouse, 20% land) because "no one wants property in Scranton." The same depreciation methods are used for financial reporting and tax purposes, and assume tax rates won't change over the foreseeable future.

• Andy Bernard is hoping to be promoted to the VP of the Printer Division, which is a much larger division than the Paper Division. A key determinant of whether Bernard will be promoted is the profitability of the Paper Division over the next two years.

Problem 1: How should the purchase costs be allocated to the assets?