1)These expenditures were incurred by Dunston Company in purchasing land: cash p
ID: 2461707 • Letter: 1
Question
1)These expenditures were incurred by Dunston Company in purchasing land: cash price $61,810; accrued taxes $4,860; attorney’s fees $3,050; real estate broker’s commission $3,690; and clearing and grading $4,650.
What is the cost of the land?
2) Gant Company reported net income of $200,270. It reported depreciation expense of $14,740 and accumulated depreciation of $50,830. Amortization expense was $9,120. Gant purchased new equipment during the year for $54,860.
Determine net cash provided by operating activities.
Net cash provided by operating activities $______?
Explanation / Answer
1.
Land is a fixed asset. When it is purchased, all costs related to land acquisition are included.
• Purchase price or fair market value at time of acquisition
• Commissions
• Professional fees (title searches, architect, legal, engineering, appraisal, surveying, environmental assessment, etc.)
• Accrued and unpaid taxes
• Other costs incurred in acquiring the land including
• Right-of-way
• Costs of razing a previous structure to build a new one. The cost for a new structure is capitalized.
Answer:
Cost of land=Cash price + Accrued taxes + Attorney’s fees + Real estate broker commission + clearing & grading
Cost of land=61,810+ 4,860 + 3,050 + 3,690 + 4,650=$78,060
2. Cash inflow from operating activities means net cash resulting from the business activities.
Business or operating activities include the activities which are the primary source of revenue like buying and selling of merchandise , manufacturing and selling ,however other activities which are also carried out as part of the business process like purchase and sale of plant and land etc are not counted as operating activities. Though they affect the net income , the effect of non business activities is ignored while calculating cash resulting from operating activities.
Hence, in order to calculate the cash from operating activities from the net income ,below adjustments are required to be made to the net income.
Net Income
Add: Depreciation
Add: Loss on sale of assets
Add: Decrease in assets/Increase in liabilities
Less: Increase in assets/Decrease in liabilities
Cash flow from operating activities
Net Income 200,270
Add: Depreciation 14,740
Add: Amortization expense 9,120
Add: Loss on purchase of plant 4,030
Cash from operating activities 228,160
Calculation of loss on purchase
Since accumulated depreciation is given and sale price of equipment not given ,it is assumed that the asset is fully depreciated and hence the book value of the asset is equal to depreciation amount.
Profit/Loss =Book value of asset-Purchase price of new asset
Book value of fully depreciated asset=Depreciation amount
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