Question

IBM acquired land and a building for a purchase price of $2,290,000. Before purchasing, they paid $30,000 for an appraisal that determined the fair value of the land as $756,000 and the building as $1,944,000. Additionally, IBM incurred a closing cost of $180,000 to complete the transfer. Two days after completion of the transfer, the building had a leak that required $75,000 worth of damage to be repaired.

What is the acquisition cost that would be capitalized, individually, to the land and building accounts? Provide references to support why each cost, beyond the purchase price, is included or excluded in the total cost to be capitalized for each asset.

Answer 1

Calculation of capitalization cost to the plant and building
Purchase price of the building	2290000
apprisal to determine fair value	30000
closing cost paid	180000
Total cost to be capitalized	2500000	2290000+30000+180000
Purchase price of the building is 2290000 it will be included because it is the consideration paid to acquire the land and building
apprisal cost will be included in the capitalization cost that is $30000 because this cost is to determine the fair value of the asset. While purchasing the asset   commission or valuer or any charges relating to purchase of the asset must be included in the cost of the asset and it will be capitalized and written a over the life of the assets
additionally incurred $180000 is the as a additional cost to transfer this cost also so capitalized capitalization because the rights on the asset will receive after the legal transfer of the asset so it will be included in the capitalization cost
$75000 incurred the after the transfer as a leak proof expenses it will not be considered as capital expenditure because the expenditure incurred till transfer of asset will be capitalized. The leak proof expenditure in a nature of operating / maintenance to the building so it will not be capitalized