Scott Company has asked, you, Garcia & Garcia, CPAs, for advice regarding financial reporting for some of its property, plant, and equipment. Scott purchased land as a site for construction of a factory. Outside contractors were engaged to:

o construct the factory.

o grade and pave a parking lot adjacent to the factory for the exclusive use of the factory workers.

Operations at the new location began during the year, and normal factory maintenance costs were incurred after production began.

Required: Draft a memorandum (see required format below) to Scott Company addressing the five specific questions (numbered 1 and 2a. through 2d.below) posed to Garcia & Garcia. For questions 2a. through 2d., be sure to include the balance sheet and income statement effects of these transactions as part of your response. Grading will be based on (a) technical content and (b) use of standard English (to include organization, word choice, and grammar). Do not use a table, bullet point list, or other abbreviated form of presentation. Do not discuss capitalization of interest.

1. How should you distinguish between capital and revenue expenditures?

2. How should you account for and report each of the following expenditures at the time incurred and in subsequent accounting periods?

a. Purchase of land.

b. Construction of factory.

c. Grading and paving of a parking lot.

d. Payment of normal factory maintenance costs.

Be sure to use memorandum format. Accordingly, you should begin your memorandum as outlined below:

To: Scott Company

From: Garcia & Garcia, CPAs

Subject: Questions regarding financial reporting of property, plant, and equipment.