Lexington Self Storage Purchased Land Paying 125,000 Cash

Lexington Self Storage Purchased Land Paying 125000 Cash As A Down

Lexington Self Storage purchased land, paying $125,000 cash as a down payment and signing a $140,000 note payable for the balance. Lexington also had to pay delinquent property tax of $2,500, title insurance costing $5,500, and $18,000 to level the land and remove an unwanted building. The company paid $54,000 to add soil for the foundation and then constructed an office building at a cost of $970,000. It also paid $36,000 for a fence around the property, $11,000 for the company sign near the property entrance, and $4,000 for lighting of the grounds. What is the capitalized cost of each of Lexington’s land, land improvements, and building?

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The acquisition and development costs of property, land improvements, and buildings are fundamental considerations in accounting and financial reporting, particularly regarding capitalization and depreciation. These costs not only reflect the initial investment but also influence future expense recognition and asset valuation. In this scenario, analyzing the specific costs associated with Lexington Self Storage’s land purchase and subsequent development provides insight into proper capitalization under accounting standards.

Capitalized Cost of Land

The cost basis for land includes all expenditures necessary to acquire the land and prepare it for its intended use. This generally encompasses the purchase price, closing costs such as title insurance, and costs related to removing old structures or preparing the site, such as leveling the land. Notably, land improvements that add value and extend the property's useful life are accounted for separately.

In this case, Lexington paid $125,000 as a cash down payment and took on a note payable of $140,000 for the land purchase. For accounting purposes, the total cost of the land is the sum of all costs directly attributable to acquiring and preparing it for use. These include:

- The purchase price ($125,000 cash paid)

- Delinquent property tax ($2,500), which must be paid to clear title or settle outstanding obligations linked to the land, since these are necessary costs to obtain ownership

- Title insurance ($5,500), essential for establishing clear ownership

- Land leveling and removal of unwanted structures ($18,000), which improve the land’s condition and usability

Therefore, the capitalized cost of the land is:

$125,000 + $2,500 + $5,500 + $18,000 = $151,000

This total reflects all costs to acquire and prepare the land for its intended use.

Capitalized Cost of Land Improvements

Land improvements are enhancements that add value, extend usability, or increase the property's aesthetic appeal but are not considered part of the land’s core. These include fencing, signage, lighting, and other physical enhancements. These costs are capitalized separately from the land itself and are subject to depreciation.

From the provided data, the costs attributable to land improvements are:

- Fence around the property ($36,000)

- Company sign near the property entrance ($11,000)

- Lighting of the grounds ($4,000)

Summing these yields:

$36,000 + $11,000 + $4,000 = $51,000

This amount represents the capitalized cost of land improvements, which will be depreciated over their useful lives.

Capitalized Cost of Building

The costs incurred to construct the office building include the direct construction costs and any necessary expenditures to prepare the site for building operations. The relevant costs here are:

- Soil addition for foundation ($54,000)

- Construction of the office building ($970,000)

The soil addition, often considered part of land improvements related to the building’s foundation or site preparation, is capitalized as part of the building project if it directly relates to the construction. The cost of the building itself is $970,000, and the soil addition of $54,000 is included because it supports the foundation and the building’s structural integrity.

Hence, the total capitalized cost of the building is:

$970,000 + $54,000 = $1,024,000

This sum encompasses both the direct construction cost and related site improvements necessary for the building's use.

Summary

In conclusion, the capitalized costs are as follows:

- Land: $151,000

- Land improvements: $51,000

- Building: $1,024,000

These amounts reflect the proper accounting treatment of costs associated with each asset category, complying with relevant standards such as Generally Accepted Accounting Principles (GAAP). Proper capitalization impacts depreciation disclosures, asset valuation, and ultimately the company’s financial health.

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References

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