Question

On February 1, 2010, Nelson Corporation purchased a parcel of land as a factory site for $200,000. An old building on the property was demolished, and construction began on a new building which was completed on November 1, 2010. Costs incurred during this period are listed below:

Demolition of old building $ 20,000
Architect's fees 35,000
Legal fees for title investigation and purchase contract 5,000
Construction costs 1,090,000
(Salvaged materials resulting from demolition were sold for $10,000.)
Nelson should record the cost of the land and new building, respectively, as
a. $225,000 and $1,115,000.
b. $210,000 and $1,130,000.
c. $210,000 and $1,125,000.
d. $215,000 and $1,125,000.

Answer 1

The cost of the land is $210,000 after accounting for demolition costs and proceeds from salvaged materials, while the cost of the new building is $1,130,000, which includes the construction costs, architect's fees, and legal fees.

Step-by-step explanation:

When accounting for the purchase and improvement of property, the cost of land and buildings are accounted for separately. The purchase price of the land is $200,000. The demolition costs are typically capitalized to the cost of the land because they prepare the land for its intended use, resulting in an additional $20,000. However, the proceeds from the sale of salvaged materials ($10,000) should be deducted from the cost, leaving the land cost at $210,000.

Expenses that are directly related to the construction of the new building, such as the architect's fees ($35,000), legal fees for title and contract ($5,000), and the construction costs ($1,090,000), should be capitalized to the building. This gives us a total of $1,130,000 for the new building.

Therefore, the correct accounting treatment would record the cost of the land as $210,000 and the cost of the building as $1,130,000. So the answer is option b. $210,000 and $1,130,000.