CASE 7-2. Joan Holtz(C)

Joan Holtz said to the accounting instructor,” The general principal for arriving at the amount of a fixed assets that is to be capitalized is reasonably clear, but there certainly are a great many problems in applying this principle to specific situation.

QUESTION 1:
1. Suppose that the Bruce Manufacturing Company used its own maintenance crew to build an additional wing on its existing factory building. What would be the proper accounting treatment for the following treatment of the following items?

Question 1-a

Architects’ fees should be capitalized. Architect is employed to seek planning and building approvals from the relevant authorities before a building project can be implemented. (These are all …show more content…

In addition, all the costs associated with getting the land ready for the construction should be capitalized as the cost of the land. Therefore, the cost of demolishing the existing buildings to have the land ready for the construction should also be capitalized as the cost of the land.

Question 2-c

If a single company had owned this large piece of land, the land and the buildings thereon should be separate items in the fixed assets of the company.
The reason is because the buildings have a limited economic life, while the land will last indefinitely. Hence, the buildings will be depreciated while the land is not depreciated. As can be referred in the answer of (a) and (b) above, the intention of the purchase is to have a land ready to build new buildings. Therefore, all the costs involved to have the land ready to construct new buildings are capitalized as the cost of the land

In addition, as for (c), the land and the buildings are already separate assets items. Therefore, the cost of the land is not affected. The intention is to construct a new hotel and office building, and to do this, the existing buildings need to be demolished. Hence, the costs of the demolition of the existing buildings are capitalized along with the costs of the new buildings.

In the beginning, purchase price of old building in owner book would be the original cost of the building. The cost is recorded less its accumulated depreciation in owner’s