What is the amount that Fresh Veggies, Inc. should record as the cost of the land?
Answer:
Fresh Veggies, Inc. should book the cost of the land as $436,300, which includes the purchase price, broker's commission, title insurance, and closing costs. The cost of demolishing the existing warehouse is not included.
Explanation:
Fresh Veggies, Inc. (FVI) purchased a land and warehouse at the cost of $410,000. In addition to the purchase price, they incurred the following expenditures related to the acquisition:
- Broker's commission = $21,000
- Title insurance = $1,100
- Miscellaneous closing costs = $4,200
- Demolition of the warehouse = $21,000
To determine the amount that FVI should record as the cost of the land, we need to add up all the expenses related to the land purchase:
$410,000 (purchase price) + $21,000 (broker's commission) + $1,100 (title insurance) + $4,200 (closing costs) + $21,000 (demolition cost) = $457,300
However, the cost of demolishing the warehouse is not considered part of the land's cost, as it is a cost related to preparing for the new warehouse, not the land itself. Therefore, the correct amount that FVI should record as the cost of the land is $436,300.
In accounting, the cost of an asset includes the purchase price and any necessary expenditures to prepare the asset for its intended use. The total cost of the land for FVI includes the purchase price, broker's commission, title insurance, and closing costs. The demolition cost is not included in the land cost calculation.