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?
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
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