Question

Polly Corporation purchases land for 200,000. Polly incurs the following costs associated with the land acquisition: Property taxes for current year4,000, Delinquent property taxes 8,000, Commission to broker14,000, Cost of grading 2,000, Cost of land improvements12,000. What is the amount that Polly should capitalize in the land account?

1) $222,000
2) $224,000
3) $240,000
4) $236,000
5) $200,000

Answer 1

Polly Corporation should capitalize a total of $228,000 in the land account, which includes the purchase price and various other costs directly associated with preparing the land for use, but excluding the cost of land improvements that are not capitalized in the land account.

Step-by-step explanation:

The amount that Polly Corporation should capitalize in the land account is the purchase cost plus all expenditures that are necessary to get the land ready for its intended use. This includes the purchase price of $200,000, along with additional costs directly related to the land acquisition such as: property taxes for the current year $4,000, delinquent property taxes $8,000, and commission to broker $14,000. The cost of grading $2,000 can also be considered part of the land preparation costs and thus should be capitalized. However, land improvements are typically considered separate from the land itself and are subject to depreciation, therefore the cost of land improvements $12,000 should not be capitalized into the land account but in a separate improvements account. Therefore, the total amount to be capitalized in the land account would be the sum of the purchase price, property taxes, delinquent taxes, broker commission, and grading costs. This amounts to $200,000 (purchase price) + $4,000 (current year taxes) + $8,000 (delinquent taxes) + $14,000 (broker commission) + $2,000 (grading) = $228,000.