Question

Beaver Company purchased land as a factory site for $400,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months. The company paid $42,000 to raze the old buildings and sold salvaged lumber and brick for $6,300. Legal fees of $1,850 were paid for title investigation and drawing the purchase contract. Beaver Company paid $2,200 to an engineering firm for a land survey, and $68,000 for drawing the factory plans. The land survey had to be made before definitive plans could be drawn. Title insurance on the property cost $1,500, and a liability insurance premium paid during construction was $900. The contractor's charge for construction was $2,740,000. The company paid the contractor in two installments: $1,200,000 at the end of 3 months and $1,540,000 upon completion. Interest costs of $170,000 were incurred to finance the construction.

Instructions:
Determine the cost of the land and the cost of the building as they should be recorded on the books of Beaver Company. Assume that the land survey was for the building.

Answer 1

When it comes to capitalizing assets, all expenses that relate to the acquisition and installation of the asset will be capitalized.

Land

= Cost of land + razing cost + Legal fees + Title insurance - Salvaged lumber

= 400,000 + 42,000 + 1,850 + 1,500 - 6,300

= $‭439,050‬

Building

= Survey cost + Drawn up factory plans + liability insurance + Construction cost + interest cost

= 2,200 + 68,000 + 900 + 2,740,000 + 170,000

= $‭2,981,100‬