On March 1, 2017, Westmorlan Company acquired real estate on which it planned to

ID: 2573058 • Letter: O

Question

On March 1, 2017, Westmorlan Company acquired real estate on which it planned to construct a small office building. The company paid $90,000 in cash. An old warehouse on the property was razed at a cost of $9,200; the salvaged materials were sold for $2,000. Additional expenditures before construction began included $1,600 attorney’s fee for work concerning the land purchase, $4,800 real estate broker’s fee, $7,600 architect’s fee, and $14,400 to put in driveways and a parking lot.

(a)

Determine the amount to be reported as the cost of the land.

Cost of land $

Explanation / Answer

Solution:

Westmorlan Company

Determination of the amount to be reported as the cost of the land:

Cost of land –

Cash paid

$90,000

Add:

Net cost of disposing warehouse

$9,200 -$2,000

$7,200

Attorney's related to land purchase

$1,600

Real estate broker's fees

$4,800

Total cost of land

$103,600

Notes:

All the related costs to the purchase of land are added to arrive at the total cost of land.

Removal of warehouse is essential to prepare the land for construction activity.

Attorney’s cost is incurred to facilitate land acquisition.

Real estate broker’s fees is also related to the land acquisition.

However, architect’s fee is not related to land, as it relates to building and hence not included in the total cost.

Similarly, driveways and parking lot costs are related to building and hence do not form part of cost of land.