Question

Blossom Co. purchased land as a factory site for $552,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months. The company paid $57,960 to raze the old buildings and sold salvaged lumber and brick for $8,694. Legal fees of $2,553 were paid for title investigation and drawing the purchase contract. Blossom paid $3,036 to an engineering firm for a land survey, and $93,840 for drawing the factory plans. The land survey had to be made before definitive plans could be drawn. Title insurance on the property cost $2,070, and a liability insurance premium paid during construction was $1,242. The contractor’s charge for construction was $3,781,200. The company paid the contractor in two installments: $1,656,000 at the end of 3 months and $2,125,200 upon completion. Interest costs of $234,600 were incurred to finance the construction. Determine the cost of the land and the cost of the building as they should be recorded on the books of Blossom Co. Assume that the land survey was for the building.Cost of the Land Cost of the Building

Answer 1

Cost of land = $605,889

Cost of building = $4,113,918

Step-by-step explanation:

In financial accounting terms, costs of property, plant and equipment include the purchase price of the asset and all the expenditures necessary to prepare the asset for its intended use. For lands, apart from the purchase price, the other necessary costs may include commissions, legal fees, cost of demolition of an old building, cost of excavation etc. While for buildings the other necessary expenditures may include; closing costs, construction costs, and other fees, including interests incurred due to a prolonged construction period. Note also that in this example, title insurance will be charged on land because it is an insurance policy between a buyer and a seller. and since the land was bought and building constructed, the title insurance is recorded against the land, meanwhile the liability or construction insurance is an expense on the building.

The allocation of costs on the land and building are calculated as follows:

Particulars Land ($) Building($)

purchase....................................................... 552,000

building razing cost .................................. 57,960

salvaged lumber and bricks.................... (8,694)

legal fees..................................................... 2,553

land survey.................................................. 3,036

plan drawing............................................... 93,840

title insurance............................................. 2,070

liability insurance....................................... 1,242

construction cost....................................... 3,781,200

interest......................................................... 234,600

Total 605,889 4,113,918

Please note that the salvaged price gotten from the sales of lumber and bricks are deducted from the costs of the building because they are recovered costs.