What are the amounts that Fullerton Waste Management should capitalize as the cost of the land and the building?
The amounts Fullerton should capitalize as the cost of the land and the building are $787,000. Fullerton Waste Management purchased land and a warehouse for $760,000. In addition to the purchase price, Fullerton made the following expenditures related to the acquisition: broker's commission, $46,000; title insurance, $11,000; miscellaneous closing costs, $14,000. An independent appraisal estimates the fair values of the land and warehouse at $731,000 and $129,000, respectively. To determine the amounts to be capitalized, we need to calculate the costs for the land and the building separately.
Land value = $731,000
Costs to be capitalized for land = $760,000 - $731,000 = $29,000
Warehouse value = $129,000
Costs to be capitalized for warehouse = $46,000 + $11,000 + $14,000 + $129,000 = $200,000
Total costs to be capitalized = $29,000 + $200,000 = $229,000
Therefore, the total costs to be capitalized for the land and building are $787,000.
Understanding Capitalization of Acquisition Costs
Capitalization of Costs: When a company acquires assets such as land and buildings, certain costs incurred during the acquisition process need to be capitalized. Capitalization involves adding the relevant costs to the value of the asset rather than expensing them immediately.
Land and Building Costs: In the case of Fullerton Waste Management, the total acquisition costs for the land and building amount to $787,000. This includes the purchase price of $760,000 and additional expenditures like broker's commission, title insurance, and closing costs.
Calculating Capitalized Costs: To determine the amounts that should be capitalized for the land and building, the fair values of the assets are taken into consideration. The difference between the purchase price and the fair value of the land is calculated as $29,000 for the land. For the building, the total of all related costs, including the fair value of the building, results in a capitalized cost of $200,000.
Final Capitalization Amount: By summing up the capitalized costs for both land and building, the total amount to be capitalized by Fullerton Waste Management is $787,000. This amount represents the total investment in the acquisition of the land and building assets.
In conclusion, proper capitalization of acquisition costs is essential for accurately reflecting the value of assets on the company's balance sheet. By following accounting principles and guidelines, Fullerton Waste Management has determined the appropriate amounts to capitalize for the land and building, ensuring transparency and accuracy in their financial reporting.