The Flex Factory Accounting for Property, Plant and Equipment Freddy Finn came into a large inheritance and decided to invest in a gym business, which he called The Flex Factory. He paid $100,000 for a track of land with an old building on it. He 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 Flex Factory opened on January 1, 2012. He selected June 30 for his 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 he signed a mortgage payable for $300,000 and the remainder was paid in cash.

3. Assuming that Freddy 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?