Calculating the Cost of Land Acquisition for Soccer Wholesale
What is the amount that Soccer Wholesale should record as the cost of the land?
Answer:
Soccer Wholesale should record the cost of the land as $759,000. This calculation involves adding the purchase price of the land ($800,000) to the costs directly related to the acquisition of the land, and then subtracting the cost of demolishing the warehouse ($80,000).
Understanding the Cost of Land Acquisition:
Cost of Land: Land acquisition costs for a business include not only the purchase price of the land but also additional expenditures directly related to the acquisition process.
The costs directly related to the acquisition of land are those that are incurred in order to acquire the land and make it ready for use. Such costs may include broker's commissions, title insurance, and various closing costs.
In the case of Soccer Wholesale, the costs directly related to the acquisition of the land are:
- Broker's Commission: $48,000
- Title Insurance: $3,000
- Miscellaneous Closing Costs: $8,000
It's important to note that the cost of demolishing the warehouse is not considered a cost directly related to the acquisition of the land. This is because the warehouse was already on the land when purchased, and demolishing it is not necessary to prepare the land for use.
Therefore, the cost of the land that Soccer Wholesale should record is calculated as follows: $800,000 (purchase price) + $48,000 (broker's commission) + $3,000 (title insurance) + $8,000 (closing costs) - $80,000 (demolition cost) = $759,000.
By properly calculating the cost of land acquisition, Soccer Wholesale can accurately reflect the value of their real estate assets in their financial records.