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Fullerton Waste Management purchased land and a warehouse for $720,000. In addition to the purchase price,...

Fullerton Waste Management purchased land and a warehouse for $720,000. In addition to the purchase price, Fullerton made the following expenditures related to the acquisition: broker’s commission, $42,000; title insurance, $9,000; miscellaneous closing costs, $12,000. Assume that Fullerton decides to use the warehouse rather than demolish it. An independent appraisal estimates the fair values of the land and warehouse at $533,000 and $287,000, respectively.

Determine the amounts Fullerton should capitalize as the cost of the land and the building.

Capitalized cost of land: ?

Capitalized cost of building: ?

Solutions

Expert Solution

Total cost of Land and warehouse = Purchase price + Broker’s commission + Title insurance + Miscellaneous closing costs

= 720,000 + 42,000 + 9,000 + 12,000

= $783,000

An independent appraisal estimates the fair values of the land and warehouse at $533,000 and $287,000, respectively.

Percentage of Fair value of land = Fair value of land/Total fair value of land and warehouse

= 533,000/(533,000 + 287,000)

= 533,000/820,000

= 65%

Percentage of Fair value of warehouse = Fair value of warehouse/Total fair value of land and warehouse

= 287,000/(533,000 + 287,000)

= 287,000/820,000

= 35%

Total cost of Land and warehouse will be divided between land and warehouse in the ratio of their fair values.

Capitalized cost of land = Total cost of Land and warehouse x Percentage of Fair value of land

= 783,000 x 65%

= $508,950

Capitalized cost of building = Total cost of Land and warehouse x Percentage of Fair value of land

= 783,000 x 35%

= $274,050

ekkarill92 answered 1 year ago
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