Fullerton Waste Management Building and Land Acquisition: Capitalized Cost Calculation
Fullerton Waste Management Building and Land Acquisition
Fullerton Waste Management purchased land and a warehouse for $610,000. In addition to the purchase price, Fullerton made the following expenditures related to the acquisition: broker’s commission, $31,000; title insurance, $3,500; miscellaneous closing costs, $6,500. An independent appraisal estimates the fair values of the land and warehouse at $497,000 and $213,000, respectively.
Determine the Capitalized Cost
Capitalized cost of land = $
Capitalized cost of building = $
Answer
Capitalized cost of land = $455,700
Capitalized cost of building = $195,300
Explanation
All the costs of purchasing the land and warehouse should be capitalized so we first have to sum all the costs: Cost of land and warehouse $610,000 + Brokers commission $31,000 + title insurance $3,500 + miscellaneous closing costs $6,500 = Total cost to be capitalized $651,000.
Then you must divide into the cost of land and the cost of building. For this, we will use the independent appraisal estimates:
- Land: $497,000 / ($497,000 + $213,000) = 0.7
- Building: $213,000 / ($497,000 + $213,000) = 0.3
Capitalized cost of land would be $651,000 * 0.7 = $455,700
Capitalized cost of building would be $651,000 * 0.3 = $195,300
Final Answer
The capitalized cost for Fullerton Waste Management's land acquisition is $459,138 and for the building is $191,862, calculated based on their respective fair values and the total acquisition cost.
Explanation
The capitalized costs for the land and building can be calculated by allocating the total acquisition costs based on the proportionate fair values of both the land and the building. In this case, Fullerton Waste Management has a total acquisition cost of $651,000 ($610,000 purchase price + $31,000 broker's commission + $3,500 title insurance + $6,500 closing costs). The fair value of the land is $497,000 and the total fair value of both is $710,000 ($497,000 + $213,000). Therefore, the capitalized cost for the land will be $459,138 [($497,000 / $710,000) * $651,000] and for the building, it will be $191,862 [($213,000 / $710,000) * $651,000].
What are the capitalized costs of land and building for Fullerton Waste Management's acquisition?
The capitalized cost of land is $455,700, and the building is $195,300, based on fair values and total acquisition cost allocation.