Question

Real Angus Steakhouse purchased land for $75,000 cash. Commissions of $4,500, property taxes of $5,000, and title insurance of $800 were also incurred. The $5,000 in property taxes includes $4,000 in back taxes paid by Real Angus on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should Real Angus Steakhouse record the land?

a. $84,300
b. $85,300
c. $75,000
d. $83,500

Answer 1

a. $84,300.

Step-by-step explanation:

IAS-16 that deals with Property, Plant, and Equipment requires entities to capitalize those costs that needs to be incurred to bring the asset to its intended use or to get control of the asset in this case. Here such costs include:

- Purchase Price, Commission, Insurance, and Back Taxes.

Property Taxes due for the current year should be recognized in the Statement of Profit or Loss. This Amount of $1,000 is not capitalized because it is not necessary to pay it to gain control of the land. On the other hand, the back taxes must be paid because the company won't be allowed to transfer the land if there are any unpaid taxes, not of this year.

So, the Capitalized Cost of Land is $84,300 (75,000 + 4,500 + 800 + 4,000).