Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281



Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem

Capitalization Issues

Bellow Company purchased land for use as its corporate headquarters. A small factory that was on the land when it was purchased was tom 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, Bellow had the contractor construct a paved road that led from the public road to the parking lot of the office building.

Three years after it occupied the office building, Bellow 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.


Which of the preceding expenditures does the company capitalize? How does it depreciate or amortize each? Explain the rationale for your answers.

To determine

State the preceding expenditures capitalized by the company, explain the manner in which it depreciates or amortize each, and explain the rationale for the answers.


“Preceding expenditures capitalized by the company”:

  • Only if the expenditures benefit the future periods, they are capitalized. The cost to “purchase the land is capitalized” and it is categorised as land (non-depreciable asset). Since” tearing down” the small portion of factory makes the land for its intended use, its cost is taken as the part of the cost of the land and those expenditures are “capitalized and classified as land”.

“Manner of Depreciation or amortization”:

  • Consequently, if this cost is categorized as part of the cost of the building, then it is not depreciated. Since, the blasting of rock and exclusion is essential for the particular purpose of creating the building; its cost is capitalized as part of the cost of the building...

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