Question

Allocating Payments and Receipts to Fixed Asset Accounts

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	$3,600
b.	Cost of real estate acquired as a plant site: Land	374,000
	Building (to be demolished)	35,500
c.	Delinquent real estate taxes on property, assumed by purchaser	21,000
d.	Cost of tearing down and removing building acquired in (b)	5,900
e.	Proceeds from sale of salvage materials from old building	3,500*
f.	Special assessment paid to city for extension of water main to the property	14,000
g.	Architect’s and engineer’s fees for plans and supervision	51,400
h.	Premium on one-year insurance policy during construction	5,000
i.	Cost of filling and grading land	20,600
j.	Money borrowed to pay building contractor	877,100*
k.	Cost of repairing windstorm damage during construction	6,500
l.	Cost of paving parking lot to be used by customers	17,800
m.	Cost of trees and shrubbery planted	10,600
n.	Cost of floodlights installed on parking lot	1,200
o.	Cost of repairing vandalism damage during construction	2,900
p.	Proceeds from insurance company for windstorm and vandalism damage	7,000*
q.	Payment to building contractor for new building	935,100
r.	Interest incurred on building loan during construction	43,900
s.	Refund of premium on insurance policy (h) canceled after 11 months	417*

Required:

1. Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts. Choose the correct account from the dropdown list for each letter and enter the appropriate amount. Enter receipts as negative amounts using the minus sign.

Item	Account	Amount
a.	Land	$
b.	Land	$
c.	Land	$
d.	Land	$
e.	Land	$
f.	Land	$
g.	Building	$
h.	Building	$
i.	Land	$
j.	Other Accounts	$
k.	Other Accounts	$
l.	Land Improvements	$
m.	Land Improvements	$
n.	Land Improvements	$
o.	Other Accounts	$
p.	Other Accounts	$
q.	Building	$
r.	Building	$
s.	Building	$

2. Determine the amount debited to Land, Land Improvements, and Building.

Land	Land Improvements	Building
$	$	$

3. Since land used as a plant site does not lose its ability to provide services, it is not depreciated. Land improvements do lose their ability to provide services as time passes and are therefore depreciated .

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 $20,600 [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.

Depreciation expense would be understated & Land improvements would be overstated.

Answer 1

Answer 1 & 2.
		Land	Land Improvements	Buildings	Other Accounts
a.	Fee paid to attorney for title search	3,600.00
b.	Cost of real estate acquired as a plant site: Land	374,000.00
	Cost of real estate acquired as a plant site: Building (to be demolished)	35,500.00
c.	Delinquent real estate taxes on property, assumed by purchaser	21,000.00
d.	Cost of tearing down and removing building acquired in (b)	5,900.00
e.	Proceeds from sale of salvage materials from old building	(3,500.00)
f.	Special assessment paid to city for extension of water main to the property	14,000.00
g.	Architect’s and engineer’s fees for plans and supervision			51,400.00
h.	Premium on one-year insurance policy during construction			5,000.00
i.	Cost of filling and grading land	20,600.00
j.	Money borrowed to pay building contractor				(877,100.00)
k.	Cost of repairing windstorm damage during construction				6,500.00
l.	Cost of paving parking lot to be used by customers		17,800.00
m.	Cost of trees and shrubbery planted		10,600.00
n.	Cost of floodlights installed on parking lot		1,200.00
o.	Cost of repairing vandalism damage during construction				2,900.00
p.	Proceeds from insurance company for windstorm and vandalism damage				(7,000.00)
q.	Payment to building contractor for new building			935,100.00
r.	Interest incurred on building loan during construction			43,900.00
s.	Refund of premium on insurance policy (h) canceled after 11 months			(417.00)
Total		471,100.00	29,600.00	1,034,983.00
Answer 3.
Since land used as a plant site does not lose its ability to provide services, it is not depreciated. Land improvements do lose their ability to provide services as time passes and are therefore depreciated
Answer 4.
Depreciation expense would be understated & Land improvements would be overstated