Question

Cayo Casta Cabins Corporation recently purchased Ship Island Resort and Casino and the land on which it is located with the plan to tear down the resort and build a new luxury hotel on the site. Cayo Casta Cabin Corporation salvaged fixtures and wood flooring from Ship Island prior to demolishing the building. The proceeds from the sale of the salvaged materials should be
1. recorded as a reduction of the cost of the new hotel.
2. recognized as revenue in the period of the sale.
3. recognized as an extraordinary gain in the year the hotel is torn down.
4. recorded as a reduction of the cost of the land.

Answer 1

Answer:

4) recorded as a reduction of the cost of the land.

Explanation:

When you are calculating the cost of any land purchased, you must start with the purchase price and add all the expenditures necessary for getting the land  ready, e.g. legal fees, taxes, real estate commissions, land grading, clearing the trees, etc., and subtract any revenue obtained, e.g. from the sale of salvaged materials or timber.

total cost of land = purchase price + (fees, commissions, grading, clearance expenses, taxes, etc.) - revenue (salvaged materials, scrap, timber, etc.)