Question

During your lunchtime, which you usually spend at the university canteen in the presence of other students, one particular accounting student who was having difficulty with the textbook complained that he did not understand which costs were to be regarded as part of the acquisition cost of land, which costs were to be attributed to buildings under construction, and which were to be treated as an expense. Explain the basic principles to be followed. Are there any difficulties in applying these principles? Please provide illustration to your explanation

Answer 1

Acquisition cost concept helps determine the actual expenses of an asset; it does not only include its purchase price but many other costs as well

Alternatively referred to as book value this cost is stated under the fixed assets.

An assets acquisition cost might comprise many other costs other than the purchase price of an asset, any cost incurred to get an asset such as plant and machinery into a working state are considered a part of the asset’s acquisition cost.

Land-

When acquiring land, certain costs are ordinary and necessary and should be assigned to Land. These costs include the cost of the land, title fees, legal fees, survey costs, and zoning fees.

Also included are site preparation costs like grading and draining, or the cost to raze an old structure.

All of these costs may be considered ordinary and necessary to get the land ready for its intended use.

This asset category includes the cost of parking lots, sidewalks, landscaping, irrigation systems, and similar expenditures.

The answer to this question will become clear when depreciation is considered.

Land is considered to have an indefinite life and is not depreciated. Alternatively, parking lots, irrigation systems, and so forth do wear out and must be depreciated.