Q17E - Horngren'S Financial And Managerial Accounting

Question

Determining the cost of assets Lawson Furniture purchased land, paying \(65,000 cash and signing a \)250,000 note payable. In addition, Lawson paid delinquent property tax of \(5,000, title insurance costing \)4,000, and \(9,000 to level the land and remove an unwanted building. The company then constructed an office building at a cost of \)400,000. It also paid \(54,000 for a fence around the property, \)12,000 for a sign near the entrance, and $8,000 for special lighting of the grounds. Requirements 

1. Determine the cost of land, land improvements, and building.
2. Which of these assets will Lawson depreciate?

Step-by-Step Solution

Answer

1. Cost allocation:

Cost of land	$333,000
Cost of land improvements	$74,000
Cost of building	$400,000

 

2. Building and land improvement will be depreciated. 

Step 1: Meaning of Cost of land improvement

The cost incurred by the business unit to improve the utility of land is known as the cost of land improvement. It includes costs such as expenses incurred for correcting the level of land and the development of parking lots.

Step 2: Calculation of various costs

Cost of land:

Particular	Amount $
Cash paid	$65,000
Add: note payable	250,000
Add: title insurance	4,000
Add: delinquent property tax	5,000
Add: cost to level the land and remove the unwanted building	9,000
Cost of land	$333,000

Cost of land improvement:

Particular	Amount $
Cost of fencing	$54,000
Add: sign near the entrance	12,000
Add: Special lighting	8,000
Cost of land improvement	$74,000

Cost of building: cost of building is equal to the cost of construction i.e., $400,000.

 

Step 3: Depreciable asset

The business entity will charge depreciation on the cost of building and cost of land improvement only because the land is an appreciable asset having infinite life.