In December 2021, Ami, the owner of Elm, paid for a parcel of land along with a warehouse on behalf of Elm, the registered owner of the property, for a total cost of $700,000. Ami also paid a real estate commission of $35,000 and legal fees of $5,000 in connection with this purchase, plus $25,000 for the demolition of the warehouse. Elm will reimburse Ami for these costs in January 2021 and will begin construction of an office building on this land. Prior to the purchase, the land and warehouse were appraised at $500,000 and $200,000, respectively. How much should be capitalized to the value of the land in 2021?

Question

Quizplus · Accepted Answer

The cost of the land and warehouse was $700,000, and Ami paid an additional $35,000 in real estate commission and $5,000 in legal fees. These costs total $740,000. However, $25,000 of this total cost is for the demolition of the warehouse and is not a cost that can be capitalized to the value of the land. Therefore, the amount that can be capitalized to the value of the land in 2021 is $715,000 ($700,000 + $35,000 - $25,000). That amount exceeds the appraised value of the land prior to the purchase ($500,000), so the capitalized amount should be limited to the appraised value of the land. Therefore, the amount that should be capitalized to the value of the land in 2021 is $500,000. Note that the cost of the warehouse is not relevant to the question.

In December 2021, Ami, the Owner of Elm, Paid for a Parcel