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Chapter 9: Q17E (page 529)

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?

Short Answer

Expert verified
  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 by step solution

01

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.

02

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.

03

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.

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Most popular questions from this chapter

Making a lump-sum purchase of assets Maplewood Properties bought three lots in a subdivision for a lump-sum price. An independent appraiser valued the lots as follows:

Lot

Appraised Value

1

\(144,000

2

96,000

3

240,000

Maplewood paid \)355,000 in cash. Record the purchase in the journal, identifying each lot’s cost in a separate Land account. Round decimals to two places, and use the computed percentages throughout.

Dylan worked for a propane gas distributor as an accounting clerk in a small Midwestern

town. Last winter, his brother Mike lost his job at the machine plant. By January,

temperatures were sub-zero, and Mike had run out of money. Dylan saw that Mike’s

account was overdue, and he knew Mike needed another delivery to heat his home. He

decided to credit Mike’s account and debit the balance to the parts inventory because he

knew the parts manager, the owner’s son, was incompetent and would never notice the

extra entry. Months went by, and Dylan repeated the process until an auditor ran across

the charges by chance. When the owner fired Dylan, he said, “If you had only come to

me and told me about Mike’s situation, we could have worked something out.”

Requirements

1. What can a business like this do to prevent team member fraud of this kind?

2. What effect would Dylan’s actions have on the balance sheet? The income statement?

3. How much discretion does a business have about accommodating

hardship situations?

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What does the asset turnover ratio measure, and how is it calculated?
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