Answer:
Blue Landscaping: Computation of
Balance in Land Account:
i) on December 31, 2017:
Land = $150,000
Surveying costs = $2,400
Title Insurance = $3,840
Demolition cost = $3,360
Less Sale of Materials = $1,200
a) Balance in Land = $160,800
b) Balance in Building = $39,360 made up of:
Architectural Plans = $36,000
Building Permits = $3,360
c) Balance in Interest Expense = $5,030, calculated as follows:
$603,600 x 10% x 1/12 = $5,030
ii) on December 1, 2018:
a) Balance in Land = $160,800
b) Balance in Building:
Beginning Balance = $39,360
Contractor payments = $660,000 $( 262,800 + 333,600 + 63,600)
Total = $699,360
c) Interest Expense:
Beginning Balance = $5,030
2018 Interest = $60,360, calculated as follows: $603,600 x 10% x = $60,360
Total = $65,390
Explanation:
a) All the costs incurred necessarily in the acquisition of the land and to make it useable have to be included. Title Insurance is an insurance policy for past transactions and not for the future. It is therefore justifiable to include it like other incidental costs. The sales proceed from materials of the old building reduces the cost of the land.
b) Interest on Loan for December 31, 2017 was accrued for one month only. This is in line with the accruals concept of accounting. It was a finance cost used to create a capital asset that would generate future income. It is not capitalized but expensed in the period in which it was incurred.
