A. Abed bought a warehouse and land for $750,000. Along with the purchase price, Abed made...
A. Abed bought a warehouse and land for $750,000. Along with the purchase price, Abed made the following expenditures related to the acquisition: broker’s commission, $45,000; title insurance, $10,500; miscellaneous closing costs, $13,500. Assume that Abed will use warehouse instead of demolishing it. The warehouse was independently appraised with an estimated fair values of the land and warehouse at $680,000 and $170,000, respectively. What amounts should Abed capitalize as the cost of the land and the building
Homework Answers
| Calculation of total cost | |
| Particulars | $ |
| Purchase price of Warehouse and Land | 750000 |
| Add: Brokers Commission | 45000 |
| Add: Title insurance | 10500 |
| Add: Miscellaneous closing cost | 13500 |
| Total Cost | 819000 |
| Calculation of total fair value of both land and warehouse | |
| Particulars | $ |
| Fair value of Land | 680000 |
| Fair value of warehouse | 170000 |
| Total Fair value | 850000 |
| Capitalized cost of Land = Total cost*(Fair value of Land/Total fair value of Land and Warehouse) | |
| Capitalized cost of Land = 819000*(680000/850000) | |
| Capitalized cost of Land = 655200 |
| Capitalized cost of Warehouse = Total cost*(Fair value of Warehouse/Total fair value of Land and Warehouse) | |
| Capitalized cost of warehouse = 819000*(170000/850000) | |
| Capitalized cost of Warehouse = 163800 |
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