Maximize Your Investment: Capitalizing Land and Building Costs
How can Fullerton Waste Management determine the amounts to capitalize as the cost of the land and building?
Considering the purchase price and related expenditures, what should Fullerton include in the costs of the land and building?
Answer:
Fullerton Waste Management can determine the amounts to capitalize as the cost of the land and building by taking into account the purchase price and related expenses. For the land, the costs should include the purchase price, broker's commission, title insurance, and miscellaneous closing costs. Meanwhile, for the building, the costs should cover the purchase price and any additional expenses incurred in making the building usable.
Understanding Capitalization of Land and Building Costs
When a company like Fullerton Waste Management purchases land and a building, it's important to accurately determine the costs to be capitalized for accounting purposes. Capitalization involves recognizing the costs of acquiring, constructing, or improving assets as part of the asset's value on the balance sheet, rather than expensing them immediately.
In the case of Fullerton, the costs to be capitalized as the land's value should include the purchase price of $780,000, the broker's commission of $48,000, title insurance of $12,000, and miscellaneous closing costs of $15,000. This adds up to a total of $855,000 as the cost of the land.
For the building, since Fullerton decides to use the warehouse rather than demolish it, no additional costs were incurred to make the building usable. Therefore, the total cost of the building would be the purchase price of $780,000.
It's also essential to take into consideration independent appraisals when determining the fair values of the land and building. In Fullerton's case, the fair value of the land is $572,000, and the fair value of the building is $308,000. However, for capitalization purposes, Fullerton should capitalize $855,000 as the cost of the land and $780,000 as the cost of the building.