Question

During the year, Sloan Inc. began a project to construct new corporate headquarters. Sloan purchased land with an existing building for $750,000. The land was valued at $700,000 and the building at $50,000. Sloan planned to demolish the building and construct a new office building on the site.

1.	Classify as land and do not depreciate.
2.	Classify as building and depreciate.
3.	Expense.
4.	Capitalized
5.	Expensed as a period cost

Purchase of land for $700,000

Interest of $147,000 on construction financing incurred after completion of construction

Interest of $186,000 on construction financing paid during construction

Purchase of building for $50,000

$18,500 payment of delinquent real estate taxes assumed by Sloan on purchase

$12,000 liability insurance premium during the construction period

$65,000 cost of razing existing building

Moving costs of $136,000

Freight-in charges paid for goods held for resale

In-transit insurance on goods held for resale purchased F.O.B. shipping point

Interest on note payable for goods held for resale

Installation of equipment

Testing of newly purchased equipment

Cost of current year service contract on equipment

Answer 1

Classification and explanation provided as under:

Transaction	Classification	Explanation
Purchase of land for $700,000	Classify as land and do not depreciate.	Amount paid to be capitalized as cost of land
Interest of $147,000 on construction financing incurred after completion of construction	Expense.	Interest incurred after construction gets completed, will be expensed out
Interest of $186,000 on construction financing paid during construction	Capitalized	Interest incurred during construction period is to be capitalized to the cost of asset
Purchase of building for $50,000	Classify as building and depreciate.	Amount paid to be capitalized as cost of building
$18,500 payment of delinquent real estate taxes assumed by Sloan on purchase	Capitalized	Real estate taxes paid while purchasing the asset will be capitalized to the cost of asset
$12,000 liability insurance premium during the construction period	Expense.	Insurance premium is not capitalized because insurance is not inevitable to bring the assets to the condition and location where assets can be operated in a way as desired by the management
$65,000 cost of razing existing building	Capitalized	When an existing building is demolished to construct new building, cost of demolishing/razing is to be capitalized to the cost of new building
Moving costs of $136,000	Expense.	moving expenses incurred for the first time shipping and setting up of the fixed assets originally is capitalized, the moving expenses related to relocating the equipment or property after the assets are already in use is not capitalized
Freight-in charges paid for goods held for resale	Expense.	Freight amount paid for the assets held for sale is to be expensed out
In-transit insurance on goods held for resale purchased F.O.B. shipping point	Expense.	Insurance charges for goods held for sale are to be expensed out
Interest on note payable for goods held for resale	Expensed as a period cost	Interest on note payable for the assets held for sale is to be expensed as a period cost. Interest cost is charged to expense in the period in which it is incurred
Installation of equipment	Capitalized	Amount paid to buy the asset, to bring the asset to its location and till it is ready to use , will be capitalized to the cost of asset. Installation will be required to make the asset ready to use so it will be capitalized
Testing of newly purchased equipment	Capitalized	Amount paid to buy the asset, to bring the asset to its location and till it is ready to use , will be capitalized to the cost. Testing of equipment will ensure that the equipment is ready to use or not. Testing charges will be capitalized
Cost of current year service contract on equipment	Expense.	Service contract for equipment is for their regular maintenance, such cost will be expensed out as the equipment is already ready to use