Question

On 1st January, 2016, a building materials manufacturing company in Oman purchased a farm land from the outskirts of Al Dhakliyah region. The cost of the property was OMR 675,000 and the company has made the settlement in full. The property tax of OMR 36,000 was due from the previous owner of the farm was paid by the company. All the legal costs relating to the acquisition of land was OMR 5,400. The old building in the farm land was demolished at a cost of OMR 54,000 and certain materials from the old building were recovered by the demolishing persons. The total value of the salvaged materials from the demolished buildings was sold out and the value of such salvaged materials sold was OMR 9,000. The company is proposed to construct a new building which is going to be used exclusively for its business purpose. The city municipality has assessed for water connections, sewage and pavement of street and for this process the total cost was arrived at OMR 27,000.

a) Calculate the total cost of land to be recorded in the statement of financial position.

b) Usually, when a land is purchased much type of other related costs will be included with the purchase price of land. Mention the name of the costs which are included with the purchase price. Though it is a Land the life is an unlimited. Hence land is not considered for depreciation but land and building absolutely comes under depreciation. If you are agreeing with this statement, critically analyze with your explanation.

Answer 1

a) Cost Of Land Includes recorded in financial Statement
1 Amount Paid for Purchase of Land		675000
2 Legal Cost of Acquisition of Land		5400
3 Old Property tax Upto the date of purchase		36000
4.Cost of Preparation to get land ready for intended Purpose	54000-9000	45000
5. Cost of Improvement having unlimited Life		27000
Cost of Land to be recorded		788400

b. Nature of Cost to be Incuded in the Cost of Land

i. Purchase Cost : It is the Amount paid to the seller of the land

ii. Legal Cost : It includes the Cost paid as Say Stamp Duty to the Government, charges for mutation of name in government record

iii. Investigation Cost : It Includes the cost paid to investigate correct title of land, like title search, mesurment charges paid to government

iv. Commission : Commission paid to a person who is broker / intermediary in the transection

v. Cost of Title clearance : any cost which is paid to clear old due is also included because without payment of those charges mutation of name is not possible eg repayment of outstanding loan, payment of old governmental dues of Taxed

vi. Preparation cost : This cost is the cost incurred to prepare the land for the purpose it purchased it includes cost of dimolition of old structure, planting of tree etc. it can also be called as restoration cost

vii Cost of Improvment : It is cost which is incurred for the benifit of which life is indifinite say cost of water connection, electricity connection, road etc it is also called as deveopment cost

Though it is a Land the life is an unlimited. Hence land is not considered for depreciation but land and building absolutely comes under depreciation. If you are agreeing with this statement, critically analyze with your explanation.

Due to Infinite life of land it is a non depreciable assets. When an entity purchases land that has a building on it, the cost must be allocated between the land and the building; the result will be depreciation of the building, but not the land. A good way to derive this allocation is to use a property tax assessment or appraisal.