Allocating Payments and Receipts to Fixed Asset Accounts

The following payments and receipts are related to land, land improvements, and buildings acquired for use in a wholesale ceramic business. The receipts are identified by an asterisk.

a.

Fee paid to attorney for title search

$2,800

b.

Cost of real estate acquired as a plant site: Land

297,100

Building

28,200

c.

Special assessment paid to city for extension of water main to the property

16,700

d.

Cost of razing and removing building

4,700

e.

Proceeds from sale of salvage materials from old building

2,800*

f.

Delinquent real estate taxes on property, assumed by purchaser

11,100

g.

Premium on one-year insurance policy during construction

3,900

h.

Cost of filling and grading land

16,300

i.

Architect's and engineer's fees for plans and supervision

40,900

j.

Money borrowed to pay building contractor

696,700*

k.

Cost of repairing windstorm damage during construction

5,100

l.

Cost of paving parking lot to be used by customers

14,100

m.

Cost of trees and shrubbery planted

8,400

n.

Cost of floodlights installed on parking lot

1,000

o.

Cost of repairing vandalism damage during construction

2,300

p.

Proceeds from insurance company for windstorm and vandalism damage

5,600*

q.

Payment to building contractor for new building

742,800

r.

Interest incurred on building loan during construction

34,900

s.

Refund of premium on insurance policy (g) canceled after 11 months

2. Determine the amount debited to Land, Land Improvements, and Building.

Land	Land Improvements	Building
$	$	$

3. Since land used as a plant site Selectdoesdoes notItem 42 lose its ability to provide services, it Selectisis notItem 43 depreciated. Land improvements Selectdodo notItem 44 lose their ability to provide services as time passes and are therefore Selectnot depreciateddepreciatedItem 45 .

4. What would be the effect on the income statement and balance sheet if the cost of filling and grading land of $16,300 [payment (h)] was incorrectly classified as Land Improvements rather than Land? Assume Land Improvements are depreciated over a 20-year life using the double-declining-balance method.

SelectDepreciation expense would be understatedLand would be overstatedLand improvements would be overstatedNet income would be overstated

325*