Accounting for Property, Plant and Equipment

Mandy Moore came into a large inheritance and decided to invest in a gym business, which she called The Jet Facotry. She paid $100,000 for a track of land with an old building on it. She paid $20,000 to demolish the old building. A new building was constructed on the site at a cost of $380,000. In addition, several other costs were incurred: $10,000 in legal fees associated with the purchase of the land, $20,000 in architect fees associated with the new building. The Jet Factory opened on January 1, 2012. She selected June 30 for her fiscal year end.

1. In general, what should guide the determination of whether an acquisition cost is capitalized or expensed?

2. What costs should be capitalized in the Land account? What costs should be capitalized in the Building account? What justification can you provide for each of your cost classifications? Record the purchase in the FSET, assuming that she signed a mortgage payable for $300,000 and the remainder was paid in cash.

3. Assuming that Mandy selected to depreciate the building under the straight-line method and assumed a 30-year life with a $40,000 salvage value, record the depreciation for fiscal years 2012, 2013, and 2014 in the accounting equation. What is the effect on the income statement each year? What is reported on the balance sheet for the book value of the building?