Acquisition Costs Of Realty And Construction Project Cost ✓ Solved

Acquisition Costs of Realty and Construction Project Cost Analysis

The provided assignment involves analyzing various expenditures related to real estate acquisition, truck acquisitions, and a construction project, including journal entries, capitalization, and depreciation calculations. The instructions require organizing costs related to land, land improvements, and buildings, preparing journal entries for truck acquisitions based on different transaction types, and calculating avoidable interest and depreciation expenses for a building project.

Sample Paper For Above instruction

Part 1: Acquisition Costs of Realty

In the realm of real estate accounting, accurately identifying and classifying acquisition costs is critical to ensuring proper financial statement presentation. The expenditures listed in the prompt encompass various costs related to land, land improvements, and buildings, which must be properly allocated in the financial records.

Categorization of Expenditures

Below is a detailed classification of each item into appropriate accounts, considering whether they pertain to land, land improvements, or buildings, along with corresponding journal entries.

Item Land Land Improvements Buildings Accounts / Explanation
a) Money borrowed to pay building contractor Loan proceeds are not capitalized; financing costs are expensed or capitalized as per specific GAAP rules.
b) Payment for construction from note proceeds Construction costs are capitalized as part of the building asset.
c) Cost of land fill and clearing Capitalized as part of Land.
d) Delinquent real estate taxes on property assumed by purchaser Yes Added to the cost of land.
e) Premium on 6-month insurance policy during construction Prepaid insurance—expensed over the construction period or capitalized if directly attributable to the building.
f) Refund of 1-month insurance premium because construction completed early Refund reduces insurance expense or prepaid insurance.
g) Architect’s fee on building Capitalized as part of building costs.
h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000) Yes Land and building costs allocated based on purchase price.
i) Commission fee paid to real estate agency Yes Added to land or building cost depending on the nature of purchase.
j) Installation of fences around property Land improvements—capitalized as part of Land Improvements.
k) Cost of razing and removing building Yes Added to land cost, especially if it increases land value.
l) Proceeds from salvage of demolished building Reduces demolition costs or increases asset value.
m) Interest paid during construction on money borrowed for construction Capitalized as part of construction costs under US GAAP.
n) Cost of parking lots and driveways Yes Land improvements—capitalized accordingly.
o) Cost of trees and shrubbery planted (permanent in nature) Typically capitalized as land improvements or landscaping assets.
p) Excavation costs for new building capitalized as part of the building cost.

Part 2: Acquisition of Trucks

In assessing acquisition costs of trucks, different transaction types—cash purchase, installment purchase with zero-interest note, barter, and stock exchange—necessitate specific journal entries adhering to GAAP principles.

Truck #1: Cash Purchase

List Price: $15,000; Purchase Price: $13,900 (cash)

Dr. Equipment (Truck #1)       13,900

Cr. Cash                        13,900

The cost recorded equals the cash paid, reflecting the fair value of the asset acquired.

Truck #2: Installment with Zero-Interest Note

List Price: $16,000; Down payment: $2,000 cash; Note: $14,000 due next year, zero-interest.

The imputed interest rate is based on market rates, causing the note to be recorded at face value and interest revenue to be recognized over the year.

Dr. Equipment (Truck #2)          15,398

Cr. Notes Payable                 14,000


Cr. Discount on Notes Payable     1,398

Interest expenses are recognized over the period, and the equipment is capitalized at its fair value, considering the imputed interest.

Truck #3: Exchange of Computer System

Computer system cost: $12,000; fair value: $15,200; traded for a truck with list price of $16,000.

The transaction is recorded at fair value of the asset received or the fair value of the asset given, whichever is more clearly evident.

Dr. Equipment (Truck #3)        15,200

Cr. Computer Inventory           12,000


Cr. Gain on Exchange             3,200

Truck #4: Exchange for Stock

Market price of stock: $13 per share; 1,000 shares issued; total value: $13,000.

Asset is recorded at fair value of the stock issued.

Dr. Equipment (Truck #4)        13,000

Cr. Common Stock (par $10)          10,000


Cr. Additional Paid-in Capital     3,000

Part 3: Capitalization of Interest and Depreciation

Capitalization of Interest

Harrisburg Furniture's construction involves multiple loans with varying interest rates. The avoidable interest calculation considers the actual expenditures, weighted-average accumulated costs, and specific interest rates.

Construction costs: $5,200,000; Weighted-average expenditures: $3,600,000; Various loans' interest rates and periods are factored to compute avoidable interest (according to GAAP). The calculation involves summing actual interest costs on specific borrowed amounts plus interest on expenditures not yet paid, proportionally based on the specific interest rates.

Depreciation Expense Calculation

Using the straight-line method over 30 years with a salvage value of $300,000, depreciation expense is calculated as:

Depreciation = (Cost - Salvage Value) / Useful Life

= ($5,200,000 - $300,000) / 30


= $5,900,000 / 30


= $196,666.67 per year

This amount is expensed for 2015, reflecting straight-line depreciation.

Conclusion

This comprehensive review of acquisition and construction costs demonstrates adherence to proper accounting principles, emphasizing accurate asset capitalization, interest capitalization, and depreciation expense recognition in accordance with GAAP standards.

References

  • FASB Accounting Standards Codification (ASC) Topic 360 - Property, Plant, and Equipment
  • FASB ASC Topic 835 - Interest
  • International Financial Reporting Standards (IFRS) IAS 16 - Property, Plant and Equipment
  • Gibson, C. H. (2018). Financial Reporting & Analysis. Cengage Learning.
  • Horngren, C., Sundem, G., & Elliott, J. (2019). Introduction to Financial Accounting. Pearson.
  • Wiley, R., & Tuttle, B. (2020). Managerial Accounting. Wiley.
  • Arens, A. A., Elder, R. J., & Beasley, M. S. (2019). Auditing and Assurance Services. Pearson.
  • Chalmers, K. (2021). Advanced Accounting. McGraw-Hill Education.
  • Revsine, L., Collins, D., Johnson, W., & Mittelstaedt, F. (2019). Financial Reporting and Analysis. Pearson.
  • Canadian Institute of Chartered Accountants (CICA). (2018). Handbook of GAAP for Private Enterprises.

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