Question

Question ID: 42307FAR2019U

Pine Co. purchased land for $450,000 as a factory site. An existing building on the site was razed before construction began. Additional information is as follows:

Cost of razing old building$60,000
Title insurance and legal fees to purchase land30,000
Architect’s fees95,000
New building construction cost1,850,000

What amount should Pine capitalize as the cost of the completed factory building?

a. $2,005,000
b. $1,975,000
c. $1,945,000
d. $1,910,000


Solution

Correct answer: c.

The cost of land includes razing the building, title insurance, and legal fees to purchase land. The cost of constructing a building of $1,850,000 and the architect’s fees of $95,000 should be capitalized as the cost of a completed factory building (i.e., $1,945,000). The following schedule summarizes the classification of capitalized costs:

DescriptionAmountAccounting treatmentCategory
Purchase of land$450,000Capitalize as PP&ELand cost
Cost of razing old building$60,000Capitalize as PP&ELand cost
Payment for accrued property tax$30,000Capitalize as PP&ELand cost
Building permit$95,000Capitalize as PP&EBuilding cost
New building construction cost$1,850,000Capitalize as PP&EBuilding cost