Question

The following payments and receipts are related to land, land improvements, and buildings acquired for use in a wholesale ceramic business. The receipts are identified by an asterisk.

a.	Fee paid to attorney for title search	$ 2,500
b.	Cost of real estate acquired as a plant site: Land	285,000
	Building (to be demolished)	55,000
c.	Delinquent real estate taxes on property, assumed by purchaser	15,500
d.	Cost of tearing down and removing building acquired in (b)	5,000
e.*	Proceeds from sale of salvage materials from old building	4,000
f.	Special assessment paid to city for extension of water main to the property	29,000
g.	Architect’s and engineer’s fees for plans and supervision	60,000
h.	Premium on one-year insurance policy during construction	6,000
i.	Cost of filling and grading land	12,000
j.*	Money borrowed to pay building contractor	900,000
k.	Cost of repairing windstorm damage during construction	5,500
l.	Cost of paving parking lot to be used by customers	32,000
m.	Cost of trees and shrubbery planted	11,000
n.	Cost of floodlights installed on parking lot	2,000
o.	Cost of repairing vandalism damage during construction	2,500
p.*	Proceeds from insurance company for windstorm and vandalism damage	7,500
q.	Payment to building contractor for new building	800,000
r.	Interest incurred on building loan during construction	34,500
s.*	Refund of premium on insurance policy (h) canceled after 11 months	500

	Required:
1.	Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts in the table provided. Enter receipts as negative amounts using the minus sign.
2.	Determine the amount debited to Land, Land Improvements, and Building.
3.	The costs assigned to the land, which is used as a plant site, will not be depreciated, while the costs assigned to land improvements will be depreciated. Explain this seemingly contradictory application of the concept of depreciation.
4.	What would be the effect on the current year’s income statement and balance sheet if the cost of filling and grading land of $12,000 [payment (i)] was incorrectly classified as Land Improvements rather than Land? Assume that Land Improvements are depreciated over a 20-year life using the double-declining-balance method.

Allocation to Fixed Asset Accounts

1.	Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts in the table provided. Enter receipts as negative amounts using the minus sign.
2.	Determine the amount debited to Land, Land Improvements, and Building.

Allocation to Fixed Asset Accounts

1	Item	Land	Land Improvements	Building	Other Accounts
2	a.
3	b.
4	c.
5	d.
6	e.
7	f.
8	g.
9	h.
10	i.
11	j.
12	k.
13	l.
14	m.
15	n.
16	o.
17	p.
18	q.
19	r.
20	s.
21	Debited amounts

Answer 1

1&2) Assignment of each payment and receipt and determining the amount to be debited in each account:

(Amount in $)

1	Item	Land	Land Improvements	Building	Other Accounts
2	a.	2,500
3	b.	285,000
4	c.	15,500
5	d.	5,000
6	e.	(4,000)
7	f.	29,000
8	g.			60,000
9	h.			(6,000)
10	i.	12,000
11	j,				(900,000)
12	k,				5,500
13	l,		32,000
14	m,		11,000
15	n,		2,000
16	o,				2,500
17	p,				(7,500)
18	q,			800,000
19	r,			34,500
20	s,			(500)
21	Debited Amounts	400,000	45,000	900,000

3) According to the concept of depreciation, the land, which is used as a plant site will not lose its capability over the period of time, but land improvements will lose their capability over the period of time. Hence the cost of land used as a plant site will not be depreciated but the cost of land improvements will be depreciated.

4) If the cost of filling and grading land is incorrectly recorded as land improvements, the following effects will take place:

As the land improvements are depreciable,

The effect on the income statement:

Depreciation expense would be overstated by $1,200 ($12,000 x 20/100 x 2) &

Net income would be understated by $1,200.

The effect on the Balance sheet:

The land would be understated by $12,000,

The land improvements would be overstated by $10,800 (12,000-1,200),

The owner's capital would be understated by $1,200.