CA10-1 (Acquisition, Improvements, and Sale of Realty) Tonkawa Company purchased

Question

CA10-1 (Acquisition, Improvements, and Sale of Realty) Tonkawa Company purchased land for use as its corporate headquarters. A small factory that was on the land when it was purchased was torn down before construction of the office building began. Furthermore, a substantial amount of rock blasting and removal had to be done to the site before construction of the building foundation began. Because the office building was set back on the land far from the public road, Tonkawa Company had the contractor construct a paved road that led from the public road to the parking lot of the office building. Three years after the office building was occupied, Tonkawa Company added four stories to the office building. The four stories had an estimated useful life of 5 years more than the remaining estimated useful life of the original office building. Ten years later, the land and building were sold at an amount more than their net book value, and Tonkawa Company had a new office building constructed in another state for use as its new corporate headquarters. Instructions (a) Which of the expenditures above should be capitalized? How should each be depreciated or amor- tized? Discuss the rationale for your answers. (b) How would the sale of the land and building be accounted for? Include in your answer an explana- tion of how to determine the net book value at the date of sale. Discuss the rationale for your answer.

Explanation / Answer

The expenditures which are capitalized as Land are:

The cost of the land purchased.

Expensditure incurred in developemnt of Land.

The Expenditure which are capitalized as Building are:

The ecpenditure incurred for the construction of the building.

The building value should be depreciation over the life of the building and Land value cannot be depreciated.

The sale of The Land is accounted as a capital receipt and any gain arising thereon will be charged to income statement.

The gain on sale of the building is calculated as the Sale consideration less the book value of the building whereas the gain on sale of the land is calculated as sale consideration less cost of the purchase of the land.

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