Question

a company purchased land for $75,000 cash. commissions of $4,500, property taxes of $5,000, and title insurance of $800 were also included. the $5,000 in property taxes includes $4,000 in back taxes paid by the company on behalf of the seller and $1,000 due for the current year after the purchase date. for what amount should the company record the land?

Answer 1

The company should record the cost of the land at $84,300, which includes the purchase price, commissions, back taxes, and title insurance. The current year property taxes due after the purchase should not be included.

Step-by-step explanation:

The company should record the land at the total cost incurred to acquire it. This includes not just the purchase price but all additional expenditures that are necessary to get the land ready for its intended use. Accordingly, the land should be recorded as follows:

1. Purchase price of the land: $75,000
2. Commissions: $4,500
3. Back taxes paid on behalf of the seller (part of property taxes): $4,000
4. Title insurance: $800

The current year property tax that is due after purchase should not be included in the cost of the land. Therefore, the total amount that the company should record for the land is the sum of the purchase price, commissions, back taxes, and title insurance, which amounts to $84,300 ($75,000 + $4,500 + $4,000 + $800).