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Chapter 9: Q17E (page 529)

Determining the cost of assets Lawson Furniture purchased land, paying \(65,000 cash and signing a \)250,000 note payable. In addition, Lawson paid delinquent property tax of \(5,000, title insurance costing \)4,000, and \(9,000 to level the land and remove an unwanted building. The company then constructed an office building at a cost of \)400,000. It also paid \(54,000 for a fence around the property, \)12,000 for a sign near the entrance, and $8,000 for special lighting of the grounds. Requirements

  1. Determine the cost of land, land improvements, and building.
  2. Which of these assets will Lawson depreciate?

Short Answer

Expert verified
  1. Cost allocation:

Cost of land

$333,000

Cost of land improvements

$74,000

Cost of building

$400,000

2. Building and land improvement will be depreciated.

Step by step solution

01

Meaning of Cost of land improvement

The cost incurred by the business unit to improve the utility of land is known as the cost of land improvement. It includes costs such as expenses incurred for correcting the level of land and the development of parking lots.

02

Calculation of various costs

Cost of land:

Particular

Amount $

Cash paid

$65,000

Add: note payable

250,000

Add: title insurance

4,000

Add: delinquent property tax

5,000

Add: cost to level the land and remove the unwanted building

9,000

Cost of land

$333,000

Cost of land improvement:

Particular

Amount $

Cost of fencing

$54,000

Add: sign near the entrance

12,000

Add: Special lighting

8,000

Cost of land improvement

$74,000

Cost of building: cost of building is equal to the cost of construction i.e., $400,000.

03

Depreciable asset

The business entity will charge depreciation on the cost of building and cost of land improvement only because the land is an appreciable asset having infinite life.

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Most popular questions from this chapter

Whitney Plumb Associates surveys American eating habits. The company鈥檚 accounts include Land, Buildings, Office Equipment, and Communication Equipment, witha separate Accumulated Depreciation account for each asset. During 2018, WhitneyPlumb completed the following transactions:

Jan. 1 Purchased office equipment, \(117,000. Paid \)77,000 cash and financedthe remainder with a note payable.

Apr. 1 Acquired land and communication equipment in a lump-sumpurchase. Total cost was \(350,000 paid in cash. An independentappraisal valued the land at \)275,625 and the communication equipmentat \(91,875.

Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000through December 31 of the preceding year). Whitney Plumb received\)390,000 cash from the sale of the building. Depreciation is computed ona straight-line basis. The building has a 40-year useful life and a residualvalue of \(25,000.

Dec. 31 Recorded depreciation as follows:

Communication equipment is depreciated by the straight-line methodover a five-year life with zero residual value.Office equipment is depreciated using the double-declining-balancemethod over five years with a \)2,000 residual value.

Record the transactions in the journal of Whitney Plumb Associates.

What does the asset turnover ratio measure, and how is it calculated?

How is gain or loss determined when disposing of plant assets? What situation constitutes a gain? What situation constitutes a loss?

What is the difference between capital expenditure and a revenue expenditure? Give an example of each.

Making a lump-sum purchase of assets Maplewood Properties bought three lots in a subdivision for a lump-sum price. An independent appraiser valued the lots as follows:

Lot

Appraised Value

1

\(144,000

2

96,000

3

240,000

Maplewood paid \)355,000 in cash. Record the purchase in the journal, identifying each lot鈥檚 cost in a separate Land account. Round decimals to two places, and use the computed percentages throughout.
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