Question

Merchant Company purchased property for a building site. The costs associated with the property were: Purchase price $ 181,000 Real estate commissions 15,600 Legal fees 1,400 Expenses of clearing the land 2,600 Expenses to remove old building 1,600 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?

Answer 1

Any cost directly attributable to bring the asset into current location and condition necessary for it to be capable of operating it, in the manner intended by the management ( Para 15) 4.1.1. Clause b

According to this the cost must be allocated to the purchase of land.

There are three scenarios.

1) if the land with a building is purchased with the intention of demolishing an old building and building a new building then selling it all the costs would be assigned to the purchase of land.

2) if the land is purchased with the building on it and that building is used for a short time and then demolished then the building demolish charges would be expense out.

3)if the land with a building is purchased with the intention of demolishing an old building and building a new building then using it then two different costs accounts of land and building would be used. We would not demolish the old building without the new building being made so the demolish would be added in the incremental costs of the new building.

The given question is of the third scenario therefore

Costs of Land = $ 181,000 + $ 15,600 + $ 1400 + 2600= $ 200,600

Incremental Cost of new building = $ 1600