McCoy's Fish House purchases a tract of land and an existing building for $1,000,000. The company plans to remove the old building and construct a new restaurant on the site. In addition to the purchase price, McCoy pays closing costs, including title insurance of $3,000. The company also pays $14,000 in property taxes, which includes $9,000 of back taxes (unpaid taxes from previous years) paid by McCoy on behalf of the seller and $5,000 due for the current fiscal year after the purchase date. Shortly after closing, the company pays a contractor $50,000 to tear down the old building and remove it from the site. McCoy is able to sell salvaged materials from the old building for $5,000 and pays an additional $11,000 to level the land. Required: Determine the amount McCoy’s Fish House should record as the cost of the land. (Amounts to be deducted should be indicated by a minus sign.)

$1,068,000

Explanation:

The cost of land includes the following costs:

• Purchase price of land

• Attorney fees

• Real estate agent commission

• Title

• Recording fees

• Additional expenses :

o Clearing

o Filling and leveling of land

o Removing of old buildings

To Determine the total cost of the land.

Particulars

Amount ($)

Amount ($)

Purchase price of land

1,000,000

Title insurance

3,000

Back property taxes

9,000

Cost of removing the building

45,000

Less: Salvaged material

(5,000)

1,057,000

Level the land

11,000

Total cost of the land

1,068,000

The property tax incurred is a recurring cost. This will reported as an expense for the current year. All other cost is incurred to acquire the land. Therefore, it must be capitalized. Hence, the total amount that company MF should record as the cost of the land is. $1,068,000

1,068,000

Explanation:

Computation of cost of land

Purchase price of land                       1,000,000

Title insurance                                      3,000

Back property taxes                              9,000

Cost of removing the building            50,000

Salvaged materials                             -5,000

Cost of Leveling the land                     11,000

Total cost of the land                          1,068,000

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