5. On December 1, 2014, Hogan Co. purchased a tract of land as a factory site fo
ID: 2576594 • Letter: 5
Question
5. On December 1, 2014, Hogan Co. purchased a tract of land as a factory site for $750,000. The old
building on the property was demolished, and salvaged materials resulting from demolition were sold.
Additional costs incurred and salvage proceeds realized during December 2014 were as follows:
Cost to demolish old building $70,000
Legal fees for purchase contract and to record ownership 10,000
Title guarantee insurance 16,000
Proceeds from sale of salvaged materials 8,000
In Hogan 's December 31, 2014 balance sheet, what amount should be reported as land?
A. $776,000 B. $812,000 C. $838,000 D. $846,000
Cost to demolish old building $70,000
Legal fees for purchase contract and to record ownership 10,000
Title guarantee insurance 16,000
Proceeds from sale of salvaged materials 8,000
Explanation / Answer
Answer : C. $838,000
When land is acquired as a factory site, the cost of the land should include the purchase price of the land and such additional expenses as legal fees, title insurance, recording fees, subsequent assumption of encumbrances on the property, and the costs incurred in preparing the property for its intended use. Because the land was purchased as a factory site, the cost of razing the old building, minus any proceeds received from the sale of salvaged materials, should be capitalized as part of the land account. Thus, the amount to be reported as land is:$ 838000 ($750,000 + $10,000 + $16,000 + $70,000 – $8,000) = $ 838000Related Questions
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