In January 2018, the Paper Division of Dunder Mifflin Inc.purchased a piece of property in Scranton, Pennsylvania for$475,000. Other fees associated with the purchase, includingclosing costs and realtor commissions, totaled $25,000. Theproperty contains land, a warehouse, and equipment. The VicePresident of the Paper Division, Andy Bernard, and the ChiefFinancial Officer of Dunder Mifflin, Oscar Martinez, are discussinghow the cost of the property should be allocated to the itemspurchased. The VP of the Paper Division, Andy Bernard, wants toallocate most of the cost to the land, while the CFO argues thatthey should allocate the bulk of the purchase cost to the equipmentand warehouse because “no one wants property in Scranton.” Assumethat the same depreciation methods are used for financial reportingand tax purposes, and tax rates won’t change over the next 5 years.Andy Bernard is hoping to be promoted to the VP of the PrinterDivision, which is a much larger division than the Paper Division.A key determinant of whether Bernard will be promoted is theprofitability of the Paper Division over the next two years.
Question: What is your recommendation for allocating thepurchase costs to the assets? (6 pts.)
