What is the total amount of cost that Fresh Veggies, Inc. (FVI) should record as the cost of the land after purchasing it along with the warehouse and incurring related expenditures?
The total amount that Fresh Veggies, Inc. (FVI) should record as the cost of the land is $691,000. This includes the purchase price of the land which is $600,000, broker's commission of $40,000, title insurance of $3,000, miscellaneous closing costs of $8,000, and the cost of demolishing the warehouse at $40,000.
Understanding Capital Asset Costs
Capital Asset Costs: Capital assets involve a significant monetary investment and are expected to provide benefits over multiple accounting periods. When a capital asset is purchased, it is essential to take into account all costs related to its acquisition that contribute to the overall cost of the asset.
Details of FVI's Land Acquisition
Fresh Veggies, Inc. (FVI) purchased land and a warehouse for a total of $600,000. Apart from the purchase price, additional expenditures were made related to the acquisition. These include a broker's commission of $40,000, title insurance cost of $3,000, and miscellaneous closing costs totaling $8,000. The warehouse was demolished immediately at an additional cost of $40,000 to prepare for the construction of a new warehouse.
Calculation of Land Cost:
The cost of the land should be recorded by FVI as $691,000, as it comprises the following components:
- Purchase price of the land: $600,000
- Broker's commission: $40,000
- Title insurance: $3,000
- Miscellaneous closing costs: $8,000
- Cost of demolishing the warehouse: $40,000
By including all these expenses related to the acquisition of the land, FVI ensures that the total cost incurred is accurately reflected in the accounting records. It is crucial for companies to properly account for all costs associated with acquiring capital assets to provide a true and fair view of the financial position.