Tonkawa Company purchased land for use as its corporate headquarters. A small factory that was on the land when it was purchased was torn down before construction of the office building began. Furthermore, a substantial amount of rock blasting and removal had to be done to the site before construction of the building foundation began. Because the office building was set back on the land far from the public road, Tonkawa Company had the contractor construct a paved road that led from the public road to the parking lot of the office building.

Three years after the office building was occupied, Tonkawa Company added four stories to the office building. The four stories had an estimated useful life of 5 years more than the remaining estimated useful life of the original office building.

Ten years later, the land and building were sold at an amount more than their net book value, and Tonkawa Company had a new office building constructed in another state for use as its new corporate headquarters.

Instructions

On the basis of the case above, please answer and discuss the questions below.

1. Which of the expenditures above should be capitalized? How should each be depreciated or amortized? Provide rationale for your answers.
2. How would the sale of the land and building be accounted for? Include in your answer an explanation of how to determine the net book value at the time of sale. Provide the rationale for your answer.
3. How do you compute avoidable interest and actual interest on self constructed assets? Illustrate with examples.