Question

A company purchased property for a building site. The costs associated with the property are given below.

Purchase price = $175,000
Real estate commissions = $15,000
Legal fees = $800
Expenses of clearing the land = $2,000
Expenses to remove old building = $1,000
1. What portion of these costs should be allocated to the cost of the land and what portion should be allocated to the cost of the new building?
2. Prepare the journal entry to record these costs.

Answer 1

1. Land $193,800

Building $0

Step-by-step explanation:

1. Calculation to determine what portion of these costs should be allocated to the cost of the land and what portion should be allocated to the cost of the new building

Purchase price $175,000

Real Estate commissions $15,000

Legal fees $800

Expenses of clearing the land $2,000

Expenses to remove old building $1,000

Total $193,800

Therefore the total cost of the land is $193,800 and NO cost will be allocated to the cost of the new BUILDING

2. Preparation of the journal entry to record these costs

Dr Land A/c $193,800

Cr Cash A/c $193,800

(Being land purchased for cash and the associated expenses being recorded)