Question

In 2016, Makkah Corporation bought land for as a site for its new factory facility that was planned to be built in 2016. The following information related to the land and the factory building:

1. Purchase cost of the land                                                        $400,000
2. Closing cost                                                                                30,000
3. Assumption of lien on the land                                                 100,000
4. Cleaning and draining cost for the land                                     60,000
5. Demolition and removal of an old building on the land             70,000
6. Sale of salvaged material from the old building                         18,000
7. Land permanent improvements                                                  60,000
8. Costs of walkways, fences, and parking lots                             80,000
9. Building permit fees                                                                  24,000
10. Architectural design costs                                                           58,000
11. Excavation costs                                                                         72,000
12. Construction costs of the new building                                    570,000

Requirements:

1. What was the cost of the land that should be recognized on Makkah’s balance sheet on Dec 31, 2016?
2. If the new building was completed in 2016, what was the cost of the building that should be recognized on Makkah’s book at the end of 2016 (ignore any depreciation)?

Answer 1

Since no information regarding the accounting policies followed by Makkah is given. It is assumed Makkah prepares its balance sheet under IFRS

As per IAS 16, The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably.

The accounting treatment of land and building is as follows:

a. Cost of land that should be recognized on Makkah's balance sheet on December 31, 2016 is $430,000

Particulars	Whether to be considered in the cost of land	Reasons
Purchase Cost of Land	Yes	Costs incurred to purchase the land.
Closing cost	Yes	Costs incurred to make it ready for use, such as closing costs including legal, title fees, etc.
Assumption of lien on land	No	Since this will be for a period of time, the same should be depreciated over the time. (para 58)
Cleaning & draining cost of land	No	If the cost of land includes the costs of site dismantlement, removal and restoration, that portion of the land asset is depreciated over the period of benefits obtained by incurring those costs(para 58)
Demolition and removal of an old building on the land	No	If the cost of land includes the costs of site dismantlement, removal and restoration, that portion of the land asset is depreciated over the period of benefits obtained by incurring those costs. (para 58)
Sale of salvaged material from the old building	No	If the cost of land includes the costs of site dismantlement, removal and restoration, that portion of the land asset is depreciated over the period of benefits obtained by incurring those costs however proceeds from sale of salvaged materials from the old building must be reduced from the cost of land. (para 58)
Land Permanent improvements	No	Land improvements that have a useful life and add to the functionality of the land should be booked in a separate asset account and depreciated under IFRS. (para 58)
Costs of walkways, fences	No	Land improvements that have a useful life and add to the functionality of the land should be booked in a separate asset account and depreciated under IFRS. (para 58)

b) The cost of building to be recognized on the balance sheet is $ 724,000.

The cost of the building should be accounted as follows:

Particulars	Whether to be considered in the cost of land	Reasons
Building permit fees	Yes	any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
Architectural Costs	Yes	any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
Excavation costs	Yes	any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
Construction Costs	Yes	Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction