CH recently purchased the Elgin Hotel and the land on which it is located. The plans are to demolish the Elgin and to build a new luxury hotel on the site. CH should account for the total purchase cost of the Elgin as follows:

Question

Quizplus · Accepted Answer

The cost of the Elgin Hotel should be capitalized as part of the cost of the land since the intention is to demolish the hotel and build a new one. The cost of the new hotel should be capitalized separately as the cost of constructing the new asset. Depreciating the cost of the Elgin over the period until it is torn down is not appropriate as it does not represent the useful life of the asset. Recording it as an extraordinary loss in the year the Elgin is demolished is also not appropriate as it does not accurately reflect the nature of the transaction.

CH Recently Purchased the Elgin Hotel and the Land on Which