Question

Shelton Co. purchased a parcel of land six years ago for $877,500. At that time, the firm invested $149,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $56,000 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $929,000. What value should be included in the initial cost of the warehouse project for the use of this land?

Answer 1

Answer:

The company should recognise $929,000 as the cost the land as this the fair value as at the date when management considers to build the warehouse.

Explanation:

Cost at date of purchase of land

The inital cost of the land is $1,026,500 (cost + grading cost); and since it was leased out, it will be accounted for in line with IAS 40 (Investment Property) to earn investment income (i.e. lease income).

Measurement of Investment property

An investment property can be measured at cost or fair value. The question didn't say that the land was depreciated, hence its assumed that it was measured at fair vale.  

Measurement at date of commencement of constructing the warehouse

IAS 40 permits transferring investment property (e.g the land) to owner occupied property (i.e. the warehouse). Hence in determining the value of the land at this date we have measure the value in line with IFRS 13 (Fair Value Measurement).

Since we know the current market value of the asset at this date as $929,000. This would be recognised as the cost of the land.