Question

On December 1, 2016, Hogan Co. purchased a tract of land as a factory site for $780,000. The old building on the property was razed, and salvaged materials resulting from demolition were sold. Additional costs incurred and salvage proceeds realized during December 2016 were as follows:

Cost to raze old building $70,000

Legal fees for purchase contract and to record ownership $10,000

Title guarantee insurance $16,000

Proceeds from sale of salvaged materials $8,000

In Hogan’s December 31, 2016 balance sheet, what amount should be reported as land?

a. $806,000

b. $842,000

c. $868,000

d. $876,000

Answer 1

Answer:

C) $868,000

Explanation:

The costs associated to the purchase of the tract of land were:

• Purchase price of land = $780,000
• Demolition of old building = $70,000
• Legal fees = $10,000
• Title guarantee insurance = $16,000
• Proceeds from sale of salvaged material = $8,000

The total cost of the land = purchase price + demolition costs + legal fees + title guarantee insurance - proceeds from salvaged materials = $780,000 + $70,000 + $10,000 + $16,000 - $8,000 = $868,000

The demolition costs are capitalized to land because they are a necessary cost to bring the land into its intended condition. Legal fees and title guarantee are necessary to avoid legal problems.