Instructions

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 next to the item letter.

a.	Fee paid to attorney for title search	$ 2,600
b.	Cost of real estate acquired as a plant site: Land	309,800
	Cost of real estate acquired as a plant site: Building	52,200
c.	Delinquent real estate taxes on property, assumed by purchaser	14,145
d.	Cost of razing and removing building acquired in B	5,100
e.*	Proceeds from sale of salvage materials from old building	3,920
f.	Special assessment paid to city for extension of water main to the property	30,085
g.	Architects and engineers fees for plans and supervision	57,190
h.	Premium on one-year insurance policy during construction	5,640
i.	Cost of filling and grading land	11,840
j.*	Money borrowed to pay building contractor	921,000
k.	Cost of repairing windstorm damage during construction	5,230
l.	Cost of paving parking lot to be used by customers	30,540
m.	Cost of trees and shrubbery planted	11,510
n.	Cost of floodlights installed on parking lot	2,060
o.	Cost of repairing vandalism damage during construction	2,675
p.*	Proceeds from insurance company for windstorm and vandalism damage	7,605
q.	Payment to building contractor for new building	729,000
r.	Interest incurred on building loan during construction	34,580
s.*	Refund of premium on insurance policy (h) canceled after 11 months	470

Required:

1.

Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts in the table provided. Enter receipts as negative amounts using the minus sign.

2.

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

3.

The costs assigned to the land, which is used as a plant site, will not be depreciated, while the costs assigned to land improvements will be depreciated. Explain this seemingly contradictory application of the concept of depreciation.

4.

What would be the effect on the income statement and balance sheet if the cost of filling and grading land of $11,840 [payment (i)] 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.

1.	Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts in the table provided. Enter receipts as negative amounts using the minus sign.
2.	Determine the amount debited to Land, Land Improvements, and Building.

Allocation to Fixed Asset Accounts

1	Item	Land	Land Improvements	Building	Other Accounts
2	a.
3	b.
4	c.
5	d.
6	e.
7	f.
8	g.
9	h.
10	i.
11	j.
12	k.
13	l.
14	m.
15	n.
16	o.
17	p.
18	q.
19	r.
20	s.
21	Debited amounts

3. The costs assigned to the land, which is used as a plant site, will not be depreciated, while the costs assigned to land improvements will be depreciated. Explain this seemingly contradictory application of the concept of depreciation.

Since land used as a plant site ____ lose its ability to provide services, it ___ depreciated. Land improvements ___ lose their ability to provide services as time passes and are therefore ___.

4. What would be the effect on the income statement and balance sheet if the cost of filling and grading land of $11,840 [payment (i)] 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.

The effect would be that:

Depreciation expense would be overstated & Land would be overstated.

Depreciation expense would be understated & Land improvements would be understated.

Retained Earnings would be understated & Net income would be understated.

Land Improvements would be overstated & Depreciation expense would be understated.

Land would be overstated & Depreciation expense would be overstated.