Final answer:
The acquisition cost of the land is calculated by adding the purchase price, removal of the shed, filling and grading, broker commission, and closing costs, and then subtracting the salvage value of the lumber. The paving of the parking lot is not included. The correct acquisition cost of the land for Sheridan Company is therefore $74,940.
Step-by-step explanation:
The question revolves around the correct accounting treatment for various costs associated with the acquisition of land by Sheridan Company. In accounting, the acquisition cost of an asset like land includes the purchase price and all expenditures necessary to bring the asset to a condition and location suitable for its intended use.
In the given scenario, the acquisition cost of the land should include the purchase price of the land and additional costs such as the removal of the shed, filling and grading, the broker commission, and the closing costs. However, the salvage value of the lumber from the shed should be deducted from these costs, and the paving of the parking lot, being a land improvement, should not be included in the cost of the land.
Therefore, the acquisition cost calculation would be as follows:
- Purchase price: $71,000
- Removal of shed: $400
- Filling and grading: $1,800
- Broker commission: $1,330
- Closing costs: $580
- Less: Salvage value of lumber: -$170
Adding these amounts together, Sheridan will record the acquisition cost of the land as $74,940. This means the correct answer is 2) $74,940.