[nalratoss]

Okay I dislike the classification of cost to building vs land because I think this is very vague. The questions doesn’t really explain well whether they are land related vs building related.

Here is the question from Roger

Oak Co., a newly formed corporation, incurred the following expenditures related to land and building:

County assessment for sewer lines $2,500
Title search fees $625
Cash paid for land with a building to be demolished $135,000
Excavation for construction of basement $21,000
Removal of old building $21,000 less salvage of $5,000 $16,000

At what amount should Oak record the land?

$138,125
$153,500
$175,625
$154,125

I understand that 135,000 and 16,000 belongs to land. However,

1) I thought that excavation for construction of basement. You are excavating into the land, so this cost of 21,000 should belong to land.

2) How come county assessment for sewer lines and title search fees belongs? The question doesn’t even mention whether the sewer lines are imbedded in the land or in the building, nor does it mention whether title refers to land title or building title.

Thanks.

[Biff-1955-Tannen]

The excavation is not part of land because it has to do with the new building. It's part of the construction costs of the new building.

The title search fees and sewer line assessment are included because they relate directly to the purchase of the land. In the purchase of the property, the company had to have a title search for any liens etc, and the sewer line assessment is just taxes owed for a new sewer line (or repair). Both of which have nothing to do with the building, but rather the property (land) itself.

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[Anonymous]

I remember working that problem. In the real world, the sewer costs might be allocated to the building. Unless GAAP accounting states somewhere that a certain cost can be classified as part of land or building then it could conceivably go either way. But for CPA exam testing purposes, it's often best to just go with what *seems* to make the most sense (in this case, allocating sewer to land.)

[Author]

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