During the fiscal year, ABC Company incurred the following costs related to property, plant and equipment: Amount paid to the contractor for the building constructed 12,000,000 Building permit fee 120,000 Excavation cost 110,000 Architect fee 440,000 Interest that would have been earned had the money used during the period of construction been invested in the money market 330,000 Invoice cost of machine acquired, terms 8/10, n/30 6,500,000 Freight, unloading and delivery charges for machine acquired 100,000 Custom duties and other charges 270,000 Allowance and hotel accommodation, paid to foreign technicians during installation and test run of machine 520,000 Royalty payment on machines purchased (based on units produced and sold) 240,000 Cash paid for the purchase of land (none was allocated to old building) 10,000,000 Mortgage assumed on the land purchased 2,000,000 Realtor’s commission 650,000 Legal fees, realty taxes and documentation expenses 900,000 Amount paid to relocate persons squatting on the property 180,000 Cost of tearing down an old building on the land 380,000 Cost of fencing the property 500,000 1. How much should be capitalized as the cost of the land? 2. How much should be capitalized as the cost of land improvements? 3. How much should be capitalized as the cost of the building? 4. How much should be capitalized as the cost of the machine?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
During the fiscal year, ABC Company incurred the following costs related to property, plant and equipment:
Amount paid to the contractor for the building constructed 12,000,000
Building permit fee 120,000
Excavation cost 110,000
Architect fee 440,000
Interest that would have been earned had the money used during the
period of construction been invested in the
Invoice cost of machine acquired, terms 8/10, n/30 6,500,000
Freight, unloading and delivery charges for machine acquired 100,000
Custom duties and other charges 270,000
Allowance and hotel accommodation, paid to foreign technicians
during installation and test run of machine 520,000
Royalty payment on machines purchased (based on units produced
and sold) 240,000
Cash paid for the purchase of land (none was allocated to old
building) 10,000,000
Mortgage assumed on the land purchased 2,000,000
Realtor’s commission 650,000
Legal fees, realty taxes and documentation expenses 900,000
Amount paid to relocate persons squatting on the property 180,000
Cost of tearing down an old building on the land 380,000
Cost of fencing the property 500,000
1. How much should be capitalized as the cost of the land?
2. How much should be capitalized as the cost of land improvements?
3. How much should be capitalized as the cost of the building?
4. How much should be capitalized as the cost of the machine?
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