Question

On January 1, 2018, Fulton Corporation purchased land as a factory site for $80,000. Fulton paid $30,000 and signed a noninterest-bearing note requiring the company to pay the remaining $50,000 on January 1, 2021. An interest rate of 5% properly reflects the time value of money for this type of loan agreement. An old building on the property was demolished, and construction began on a new building that was completed on December 31, 2018. Costs incurred during this period are listed below:

Demolition of old building                                                                 $6,000

Architect’s fees (for new building)                                                     10,000

Legal fees for title investigation of land                                               2,000

Property taxes on land (for period beginning March 1, 2018)             5,100   

Construction costs                                                                            620,000   

Interest on construction loan                                                                3,000

Salvaged materials resulting from the demolition of the old building were sold for $1,000. The amounts Fulton should capitalize as the cost of the land and the new building would be

Answer 1

The cost of land will include purchase cost of land, cost related to demolition of old building, legal fees for title investigation of land and deducted by sale of salvaged materials resulting from demolition of old building. The proprety taxes will not be capitalized in the cost of land becasue it is an operating cost. The calculation of cost of land is shown as follows:-

Calculation of cost of Land (Amount in $)

Purchase cost of land	80,000
Cost of demolition of old building	6,000
Legal fees for title investigation of land	2,000
Less: Sale of salvaged materials	(1,000)
Cost of land	87,000

The cost of new building will include construction costs, architect's fees and interest on construction loan. Calculation of cost of new building is shown as follows:-

Calculation of cost of New Building (Amount in $)

Construction costs	620,000
Architect’s fees (for new building)	10,000
Interest on construction loan	3,000
Total Cost of New Building	633,000

Therefore, the amounts Fulton should capitalize as the cost of land is $87,000 and the new building is $633,000