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Question text Determining the Cost of an Asset Omar Corporation paid $400,000 for a tract of...

Question text

Determining the Cost of an Asset
Omar Corporation paid $400,000 for a tract of land that had an old gas station on it. The gas station was demolished at a cost of $20,000 and a new warehouse was constructed on the site at a cost of $640,000.

In addition, several other costs were incurred:

Legal fees (associated with the purchase of the land) $45,000
Architect fees (associated with the new warehouse) $50,000
Interest on the construction loan (for the new warehouse)

$24,000

(a) What value should be assigned to the tract of land?

$Answer ?

(b) What value should be assigned to the new warehouse?

$Answer ?

Solutions

Expert Solution

If land and building are purchased with the initial intent to use the land, demolish the building and build a new building, capitalize the cost to demolish the building as part of the cost of the new building.

Hence, the demolition cost $ 20,000 shall be capitalized in cost of Building.

Any costs directly attributable to bringing the asset to the location and condition of operating shall be capitalized. Hence, Legal Fee & Architect Fees shall be capitalized in respective assets.

Borrowing costs (e.g., interest costs) directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized.

Value of Land:

Intial Purchase Cost          4,00,000
Legal Fees             45,000
Total          4,45,000

Value of Building (Warehouse):

Construction Cost          6,40,000
Demolition Cost             20,000
Architect Fees             50,000
Interest on the construction loan             24,000
Total          7,34,000

ekkarill92 answered 4 months ago
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