Question

Early in its fiscal year ending December 31, 2021, Morgan Manufacturing, Inc. (MMI) finalized plans to expand operations. The first stage was completed on March 28 with the purchase of a tract of land on the outskirts of the city. The land and existing building were purchased by paying $340,000 immediately and signing a noninterest-bearing note requiring the company to pay $740,000 on December 31, 2023. An interest rate of 6% properly reflects the time value of money for this type of loan agreement. Title search, insurance, and other closing costs totaling $34,000 were paid at closing. At the end of April, the old building was demolished at a cost of $84,000, and an additional $64,000 was paid to clear and grade the land. MMI should record the land on the April 30 balance sheet as $[land].

Answer 1

Answer:

Morgan Manufacturing, Inc.

The Land should be recorded at $1,1505,597 , calculated as follows:

Down-payment - $340,000

Note payable - $628,597 (the Present value of $740,000 in 2 years at 6% interest)

Title search, etc - $34,000

Demolishing Building - $84,000

Clearing & Grading - $64,000

Explanation:

Land is a fixed asset or capital asset.  It is a resource that is expected to generate future earnings.

All costs incidental to the land acquisition must be capitalized.  The fair value of the note payable on the land is determined by calculating the present value (PV) at 6% for 2 years, in order to reflect the time value of money despite the fact that interest was not payable.