Answer:
Cost of land = $605,889
Cost of building = $4,113,918
Explanation:
In financial accounting terms, costs of property, plant and equipment include the purchase price of the asset and all the expenditures necessary to prepare the asset for its intended use. For lands, apart from the purchase price, the other necessary costs may include commissions, legal fees, cost of demolition of an old building, cost of excavation etc. While for buildings the other necessary expenditures may include; closing costs, construction costs, and other fees, including interests incurred due to a prolonged construction period. Note also that in this example, title insurance will be charged on land because it is an insurance policy between a buyer and a seller. and since the land was bought and building constructed, the title insurance is recorded against the land, meanwhile the liability or construction insurance is an expense on the building.
The allocation of costs on the land and building are calculated as follows:
Particulars Land ($) Building($)
purchase....................................................... 552,000
building razing cost .................................. 57,960
salvaged lumber and bricks.................... (8,694)
legal fees..................................................... 2,553
land survey.................................................. 3,036
plan drawing............................................... 93,840
title insurance............................................. 2,070
liability insurance....................................... 1,242
construction cost....................................... 3,781,200
interest......................................................... 234,600
Total 605,889 4,113,918
<em>Please note that the salvaged price gotten from the sales of lumber and bricks are deducted from the costs of the building because they are recovered costs.</em>
