On January 6 2016 the Mount Jackson Corporation purchased a

On January 6, 2016, the Mount Jackson Corporation purchased a tract of land for a factory site for $1,500,000. An existing building on the site was demolished and the new factory was completed on October 11, 2016. Additional cost data are shown below:

Construction cost or new building $1,760,000

Real estate and attorney fees 15,400

Architect fees 138,000 Cost to demolish old building 133,200

Salvage recovery from old building (11,000)

Which of the following correctly states the capitalized cost of the (a) land and (b) the new building?

$1,637,600/$1,898,000

$1,515,400/$2,020,200

$1,648,600/$1,887,000

$1,500,000/$2,035,600

Solution

Ans) $1,515,400/$2,020,200

Cost of Land = $1,500,000 + $15,400 = $1,515,400

Cost of Building = $1,760,000 + $138,000 + $133,200 = $2,020,200

Note: As per GAAP, if land and building are purchased with the prima facie intention to use the land, demolish the building and build a new building, then capitalize the demolition cost to the building as part of the cost of the new building. Otherwise, demolition cost treated as an expense. It may added to the cost of land if the prima facie intention to use it as a land only.

Note: (1) The above answer is 100% correct. May be you can add \"real estate attorney fees\" to Cost of Building instead of Cost of Land because this cost is genrally incurred to prepare and review real estate documents such as purchase agreement, title documents, which helps in legal guidance to people buying or selling real estate property. Examples of Real estate property are land, buiding, and other assets that are permanently attached to the land.

(2) \"Salvage recovery from old building $11,000 is an other income which should be separately recorded in profit and loss statement. You should not deduct it from Buliding Cost as per IAS 16. If you want to deduct in order to match book answers, you can deduct it from building cost and get answer as 15,00,000/20,35,600. (Not Recommended)

Cost of Land = $1,500,000.

Cost of Building = $1,760,000 + $138,000 + $133,200 + $15,400 - $11,000 = $2,035,600