January 2010, Giant Green Company pays $4,000,000 for a tract of land with two b

Question

January 2010, Giant Green Company pays $4,000,000 for a tract of land with two buildings on it. It plans to demolish Building 1 and build a new store in its place. Building 2 will be a company office; it is appraised at $842,000, with a useful life of 25 years and a $85,000 salvage value. A lighted parking lot near Building 1 has improvements (Land Improvements 1) valued at $500,500 that are expected to last another 18 years with no salvage value. Without the buildings and improvements, the tract of land is valued at $3,020,600. Giant Green also incurs the following additional costs:

Cost to demolish building 1 $500,200
Cost of additional land grading 300,000
Cost of construct new building (building 3), having a useful life of 25 years
and a $422,000 salvage value 4,851,000
Cost of new land improvements (land improvements 2) near building 2
having a 20 -year useful life and no salvage value 132,000

What is the amount that should be recorded for Land?

Explanation / Answer

DEMOLITION COSTS AS COST OF LAND When land and building are purchased, and when at that time the building is not intended for use and will be demolished, the building demolition costs should be capitalized as part of the acquisition cost of the land. These costs are necessary site preparation costs to prepare the land for its intended use. SO amount that should be recorded for Land wil be : Land Value $3,020,600 Add : Cost to demolish building 1 $500,200 ----------------------------------------------------- Land cost = $3,520,800 Note : Land Grading are part of Land improvement costs. COst of New Bldg, Parking lot etc are new assets

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