Fresh Veggies, Inc. Acquires Land and Warehouse - Analyzing Expenditures
Fresh Veggies, Inc. (FVI) purchased land and a warehouse for $520,000. Additionally, they incurred the following expenditures related to the acquisition:
- Broker's commission: $32,000
- Title insurance: $2,200
- Miscellaneous closing costs: $6,400
- Demolition of the old warehouse: $32,000
When accounting for these expenditures, it is important to consider the treatment of each cost to determine the total acquisition cost and how it impacts the financial statements.
Analysis of Expenditures:
Upon acquiring the land and warehouse for $520,000, Fresh Veggies, Inc. had to allocate the additional costs incurred during the transaction. The broker's commission, title insurance, and closing costs are typically considered part of the acquisition cost and should be capitalized along with the purchase price of the property.
Broker's Commission: The $32,000 broker's commission paid by FVI is a direct cost associated with the acquisition of the property. It represents the fee paid to the broker for facilitating the purchase and should be included in the overall cost of acquiring the land and warehouse.
Title Insurance: The $2,200 spent on title insurance is essential to protect FVI's ownership rights to the property. This cost is part of the acquisition process and should be capitalized as part of the total acquisition cost.
Miscellaneous Closing Costs: The $6,400 incurred in miscellaneous closing costs includes expenses necessary to finalize the transaction. These costs, such as legal fees or transfer taxes, are directly related to the acquisition and should be added to the acquisition cost.
Demolition Costs: The $32,000 spent on demolishing the old warehouse is a separate cost that should not be included in the land and warehouse acquisition cost. Instead, it should be expensed as it relates to preparing the property for future development, specifically the construction of a new warehouse.
By properly accounting for these expenditures, FVI can accurately reflect the total cost incurred in acquiring the land and warehouse in their financial statements. Capitalizing the appropriate costs increases the value of the asset on the balance sheet and impacts depreciation expenses over the asset's useful life.