Question

On March 1, 2017, Carla Vista Co. Acquired real estate, on which it planned to construct a small office building, by paying $79,000 in cash. An old warehouse on the property was demolished at a cost of $8,000; the salvaged materials were sold for $1,660. Additional expenditures before construction began included $1,160 attorney's fee for work concerning the land purchase, $4,400 real estate broker's fee, $8,660 architect's fee, and $13,800 to put in driveways and a parking lot. (a) Determine the amount to be reported as the cost of the land.

Answer 1

Answer:

The reported cost of the land = $99,560

Explanation:

In order to calculate the cost of the land, it is important to note that the amount recorded as cost of the land, includes the actual amount paid as the market price of the land, including all the necessary costs incurred to make the land ready for use. These include: attorney's fees, cost of demolition of old properties, broker's fees etc.

To calculate the net cost of the land, let us identify all the transactions done in the purchase of the land. This is done as follows:

market value of land = $ 79,000

cost of demolition     = $   8,000

additional expenses = $     1,160

attorney's fee            = $    4,400

broker's fee               = $    8,660

salvaged materials    = $    1,660 (minus)

Total                           = $ 99,560

Note that the amount gotten from sale of salvaged materials is subtracted from the cost of land, because it is an income, not expenditure, while the architect's fee is not used in the calculation because, it doesn't meet the criteria for cost of land, instead it is part of the cost of building after the acquisition of the land.