Final answer:
The $122,000 must be capitalized and may be depreciated. The $122,000 cost attributed to the land must be capitalized and is not depreciable. The correct answer is option D)
Step-by-step explanation:
The proper treatment of the expenditure is option D) The $122,000 must be capitalized and may be depreciated.
When Rod purchased the building for his manufacturing business, the cost of the property was $422,000, of which $122,000 was attributable to the land. In accounting, the cost attributable to the land is not subject to depreciation because land generally does not lose value over time. However, the cost attributable to the building, which is $300,000 in this case, can be capitalized and depreciated over its useful life.
The $122,000 cost attributed to the land must be capitalized and is not depreciable. The remaining $300,000 cost for the building must also be capitalized and is depreciable over its useful life, not deductible as a current expense.
The proper treatment of the expenditure for the building purchased by Rod for his manufacturing business is that the $122,000 attributable to the land must be capitalized and may not be depreciated, while the remaining $300,000 attributable to the building must also be capitalized but is eligible for depreciation over its useful life as prescribed by the IRS. Capitalizing an asset means recording it as a long-term asset on the company's balance sheet instead of expensing it on the income statement.
Statement A is correct: The $122,000 must be capitalized and may not be depreciated because land does not wear out, deplete, or get used up, and therefore does not depreciate over time in the accounting sense.
Statement B is incorrect: The $300,000 attributable to the building may not be currently deductible because buildings are considered capital assets and must be depreciated over their useful life, rather than immediately expensed.
Statement C refers to Section 179, which allows for the deduction of some or all of the cost of certain property as an expense in the year it is placed into service. However, this is typically applicable to equipment or machinery used in the business, not buildings.
Statement D is incorrect: While the cost of the building must be capitalized, it is the $300,000 – not the $122,000 – that may be depreciated over time.