Question

Tiger Industrial Inc. purchased a 20 acre tract of land and two buildings (building #1 and

building #2) for $1,000,000. The market value of the land is $700,000 and the market

value of building #1 is $350,000. Building #2 was condemned and had no market value.

The company plans to raze Building #2 and construct a new building (Building #3) on the

site. In addition to the purchase price, the company made (received) the following

expenditures (income) in the fiscal year:

Title Insurance     $ 3,000

Escrow fees      1,000

Current property taxes      2,000

Delinquent property taxes    4,000

Cost to remove Building #2     10,000

Proceeds from sale of Building #2 materials 1,000

Cost of grading land     5,000

Cost paid for new Building #3    100,000   

What should be the capitalized cost of the land, Building #1, #2 & #3?

Answer 1

Land & Building being capital assets, all expenses incurred to bring them into usable condition must be capitalized. Hence, Capitalized cost of land and Buildings #1,#2 & #3 should be :

Purchase cost. 1,000,000

+ Title Insurance. 3,000

+ Escrow Fees. 1,000

+ Current property tax. 2,000

+ Deliquent property tax. 4,000

+ Cost to remove Building #2. 10,000

+ Cost of grading land. 5,000

+ Cost paid for new building. ,010000

- Proceeds from sale of building #2 materials. (1,000)

Cost to be capitalized. 1,124,000