The following payments and receipts are related to land, land improvements, and buildings acquired for use in a wholesale apparel business

The following payments and receipts are related to land, land improvements, and buildings acquired for use in a wholesale apparel business. The receipts are identified by an asterisk.

a. Fee paid to attorney for title search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $  3,600 b. Cost of real estate acquired as a plant site:  Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720,000 Building (to be demolished). . . . . . . . . . . 60,000 c. Finder’s fee paid to real estate agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,400 d. Delinquent real estate taxes on property, assumed by purchaser . . . . . . . . . . . . . . . . . 15,000 e. Architect’s and engineer’s fees for plans for new building  . . . . . . . . . . . . . . . . . . . . . . . 75,000 f. Cost of removing building purchased with land in (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 g. Proceeds from sale of salvage materials from old building . . . . . . . . . . . . . . . . . . . . . . . 3,400* h. Cost of filling and grading land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 i. Premium on one-year insurance policy during construction. . . . . . . . . . . . . . . . . . . . . . 8,400 j. Money borrowed to pay building contractor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000* k. Special assessment paid to city for extension of water main to the property. . . . . . . 13,400 l. Cost of repairing windstorm damage during construction . . . . . . . . . . . . . . . . . . . . . . . 3,000 m. Cost of repairing vandalism damage during construction . . . . . . . . . . . . . . . . . . . . . . . . 2,000 n. Cost of trees and shrubbery planted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 o. Cost of paving parking lot to be used by customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,600 p. Interest incurred on building loan during construction . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 q. Proceeds from insurance company for windstorm and vandalism damage . . . . . . . . 4,500* r. Payment to building contractor for new building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000 s. Refund of premium on insurance policy (i) canceled after 10 months . . . . . . . . . . . . . 1,400*

Instructions

1. Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts. Indicate receipts by an asterisk. Identify each item by letter and list the amounts in columnar form, as follows:

Item Land Land Improvements Building Other Accounts

2. Determine the amount debited to Land, Land Improvements, and Building.

3. The costs assigned to the land, which is used as a plant site, will not be depreciated, while the costs assigned to land improvements will be depreciated. Explain this seemingly contradictory application of the concept of depreciation.

4. What would be the effect on the current year’s income statement and balance sheet if the cost of paving the parking lot of $21,600 [payment (o)] was incorrectly classified as Land rather than Land Improvements? Assume that Land Improvements are depreciated over a 10-year life using the double-declining-balance method.

Answer:

1.Land Other

Item Land Improvements Building Accounts

a. $ 3,600

b. 780,000

c. 23,400

d. 15,000

e.$ 75,000

f. 10,000

g. (3,400)

h. 18,000

i.8,400

j.$(800,000)

k. 13,400

l.3,000

m.2,000

n.$14,000

o.21,600

p.40,000

q.(4,500)

r.800,000

s.(1,400)

2. $860,000 $35,600 $922,000

* Received cash.

3. Land used as a plant site does not lose its ability to provide services; thus, it is

not depreciated. However, land improvements do lose their ability to provide

services as time passes and are, therefore, depreciated.

4. Because land improvements are depreciated, depreciation expense of $4,320 

[$21,600 × (100% ÷ 10) × 2] would be understated and net income would be

overstated by $4,320 on the income statement. On the balance sheet, Land would 

be overstated by $21,600, Land Improvements would be understated by $17,280 

($21,600 – $4,320), and Retained Earnings would be overstated by $4,320.