Question

January 2010, Giant Green Company pays $3,400,000 for a tract of land with two buildings on it. It plans to demolish Building 1 and build a new store in its place. Building 2 will be a company office; it is appraised at $782,000, with a useful life of 25 years and a $79,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $440,500 that are expected to last another 18 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $2,420,600. Giant Green also incurs the following additional costs:

Cost to demolish building 1	$440,200
Cost of additional land grading	240,000
Cost to construct new building (building 3), having a useful life of 25 years   and a $362,000 salvage value	4,251,000
Cost of new land improvements (land improvements 2) near building 2   having a 20 -year useful life and no salvage value	126,000

What is the amount that should be recorded for Land?

$2,939,160

$3,400,000

$2,258,960

$4,251,000

Answer 1

The correct option is $2,939,160
Appraisal cost of Building 2	782,000
Improvement cost of building 1	440,500
Value of land	2,420,600
Total cost	3,643,100
Value of 1 land (2,420,600/3,643,100)	0.6644341
Payment to demolish building 1 (3,400,000*0.6643)	2,259,076
Cost to demolish building 1	440,200
Cost of additional land grading	240,000
Amount that should be recorded on land	2,939,276
Rounded off to	2,939,160