PROBLEMS_LAND AND BUILDING

L
1. At the beginning of current year, Bach Company purchased for P 4,500,000 a tract of land a
factory site. An existing building on the property was razed and construction began on a new
factory building which was completed at year ended.

Cost of razing old building 300,000 B

Title insurance and legal fees to purchase land 200,000 L
Architect fee 950,000 B
New building construction cost 8,000,000 B

1. ) What is the cost of factory building? 9,250,000

2. ) What is the cost of the land? 4,700,000

2. Mozart Company purchased a P4,000,000 tract of land as a factory site.

L
The entity razed an old building on the property and sold the materials is salvaged from the
demolition.

Demolition of old building 200,000 B

Legal fees for purchase contract and recoding title 150,000 L
Title guarantee insurance 50,000 L
Proceeds from sale of a salvaged materials 20,000 -B

What is the initial carrying amount of land? 4,200,000

3. During the current year, Beethoven Company had the following transactions pertaining to
the new office building:

Purchase price of land as a building site 600,000 L

Legal fees for contract to purchase land 20,000 L
Architect fee 80,000 B
Demolition of old building 50,000 B
Sale of scrap from old building 30,000 -B
Construction cost of new building 3,500,000 B

1. ) What amount should be reported for land? 620,000

2. ) What amount should be reported for building? 3,600,000

4. At the beginning of current year, Brahms Company purchased a parcel of land as a factory
site for P1,000,000. L

An old building on the property was demolished and construction began a new building which
was completed at year- end.

Demolition of old building 100,000 B

Architect fee 175,000 B
Legal fee for title investigation and purchase contract 25,000 L
Construction cost 5,450,000 B
Salvaged materials resulting from demolition 50,000 -B

What amount should be recorded as cost of building? 5,675,000

5. Elgar Company purchased a tract of land as a factory site. An old building was demolished,
and construction began on the new building.

Purchase price of land and an old building 4,500,000 L 4.25M

Fair value of old building 250,000 B 250 T
-B 250 T
Cost of demolishing old building 300,000 B
Title insurance and legal fees to purchase land 200,000 L
Architect fee 950,000 B
New building construction cost 8,000,000 B
Survey before construction cost 100,000 L
Building permit or payment to city hall for approval of building construction 150,000 B
Excavation before new construction 200,000 B
Liability insurance during construction 100,000 B
New fence surrounding the new building 100,000 LI
Driveway, parking bay and safety lighting 550,000 LI
Cost of trees, shrubs and other landscaping 300,000 LI
Cost of lighting and signage 100,000 LI

1. ) What is the cost of the land? 4,550,000

2. ) What is the cost of the new building? 9,700,000

3. ) What is the cost of land improvements? 1,050,000

When the FV of the old building is given in the problem, it means that the building is
 usable. However, in the problem that usable building is to be demolished.

Land 4,250,000
Building 250,000
Cash 4,500,000

Loss 250,000
Building 250,000

Is demolition cost ALWAYS charged to Building ? NO.

Per PIC Interpretation #2d, the demolition cost is capitalized as cost of the LAND if the old
building is demolished to prepare the land for the intended use but NOT to make room
for the construction of new building.

6. Chopin Company incurred the following expenditures related to land and building:

Cash paid for land and dilapidated building 1,000,000 L

Removal of old building to make room for construction of a new building 50,000 B
Payment to tenants for vacating old building 15,000 B
Architect fee for new building 200,000 B
Building permit for new construction 30,000 B
Fee for title search 10,000 L
Survey before construction of new building 20,000 L
Excavation before new construction 100,000 B
New building constructed 6,000,000 B
Assessment by city for drainage project 5,000 L
Cost of grading, leveling and landfill 45,000 L
Driveways and walks to new building from street (part of building plan) 40,000 B
Temporary quarters for construction crew 80,000 B
Temporary building to house tools and materials 60,000 B
Cost of changes during construction to make new building more energy efficient 50,000 B
Cost of window’s broken by vandals 25,000 Exp

1. ) What is the cost of land? 1,080,000

2. ) What is the cost of new building? 6,625,000

7. Tchaikovsky Company incurred the following expenditures related to the construction of a
new home office:

Purchase price of land and an old apartment building 2,000,000

B 200 T
-B 200 T
Fair value of land 1,800,000 L
Legal fees, including fee for title search 10,000 L
Payment of land mortgage and related interest due at time of sale 50,000 L
Payment of delinquent property taxes assumed 20,000 L
Cost of razing the apartment building 30,000 B
Grading and drainage on land site 15,000 L
Architect fee on new building 200,000 B
Payment to building contractor 8,000,000 B
Interest cost on specific borrowing during construction 300,000 B
Payment of medical bills of employees accidentally injured while
inspecting building construction 10,000 Exp
Cost of paving driveway and parking lot 40,000 LI
Cost of trees, shrubs and other landscaping 55,000 LI
Cost of installing lights in parking lot 5,000 LI
Premium for insurance on building during construction 25,000 B
Cost of open house party to celebrate opening of building 60,000 Exp

1. ) What is the cost of land? 1,895,000

2. ) What is the cost of new building? 8,555,000

3. ) What is the cost of land improvement? 100,000

In this case, when the total purchase price is P2M and the fair value of the land is P1.8M,
the difference of 200T is chargeable to building. The old apartment building is USABLE;
however, it is going to be razed or demolished.
Land 1,800,000
Building 200,000
Cash 2,000,000

Loss 200,000
Building 200,000
8. Handel Company purchased land for P2,000,000 as a plant site. There was a small office
building on the land with fair value old P700,000 which the entity will continue to use with
some modification and renovation. L 1.3 M OB 700T
The entity decided to construct a factory building and incurred the following costs:

Materials and supplies 3,000,000 FB

Excavation 100,000 FB
Labor on construction 2,500,000 FB
Cost of remodeling old office building 200,000 OB
Imputed interest on corporation’s own money used during construction ignore 120,000
Cash discount on materials purchased 60,000 -FB
Supervision by management during construction 70,000 FB
Compensation insurance premium for workers 20,000 FB
Payment of claim for injuries not covered by insurance 25,000 Exp
Clerical and other expenses during construction 30,000 FB
Paving of street and sidewalks 40,000 LI
Plans and specification 140,000 FB
Legal cost of conveying land 10,000 L
Legal cost of injury claims 15,000 Exp
Saving on construction ignore 200,000

1. ) What is the cost of land? 1,310,000

2. ) What is the cost of office building? 900,000

3. ) What is the cost of factory building? 5,800,000

9. At the beginning of current year, Debussy Company reported the following property, plant
and equipment:

Land 3,500,000
Land improvements 900,000
Building 6,000,000
Equipment 1,500,000

The following transactions occurred during the current year,

 A tract of land was acquired for P1,250,000 and intended definitely for use as future
building site. L

 A plant facility consisting of land and building was acquired from another entity in
exchange for 100,000 Wolfgang Company shares. On the acquisition date, the shares
had a closing market price of P45 on a stock exchange. The plant facility was carried at
 P1,000,000 for land and P3,000,000 for the building at the exchange date. Current
appraised value for the land and building, respectively, are P1,200,000 and P2,400,000.
This is acquisition of PPE by exchange; not issuance of share capital
No cash is involved.
Order of priority :
1. FV of asset given  100,000 x 45 = 4.5 million*
2. FV of asset received
3. CA of asset given

*this is allocated between Land and Building based on relative appraised values

Land 1.2/3.6 x 4.5 M = 1.5 M

Bldg 2.4/3.6 x 4.5 M = 3 M

 Expenditures totaling P750,000 were made in early part of the year for new parking lot,
street and sidewalks at the entity’s various plant locations. These expenditures had an
estimated useful life of fifteen years. LI

 Equipment was purchased at a cost of P3,000,000. Freight and unloading charge of

P50,000, and installation cost of P350,000 were incurred. E 3.4M

 At the middle of the current year, an equipment was sold for P175,000. The original cost
of the equipment acquired two years ago was P500,000. The equipment was
depreciated on the straight-line basis over an estimated useful life of five years and no
residual value. -E 500 T

1. ) What is the cost of land at year-end? 6,250,000

2. ) What is the total cost of building at year-end? 9,000,000

3. ) What is the cost of land improvements at year-end? 1,650,000

4. ) What is the total cost of equipment at year-end? 4,400,000

10. At the beginning of the current year, Vivaldi Company reported the following balances:

Land 2,200,000
Building 6,500,000

During the current year, the following transactions occurred:

  A piece of land was acquired for P1,600,000. To be able to acquire the land, P175,000
was paid to a real estate agent, and P50,000 was incurred to clear the land. During the
course of clearing the land, timber and gravel were recovered and sold for P25,000.
Land 1,600,000 + 175,000 + 50,000 – 25,000 = 1.8 M

 A second piece of land with a building was acquired for P4,500,000. The appraiser
valued the land at P2,000,000 and the building at P1,000,000. Shortly after acquisition,
the building was demolished at a cost of P100,000. A new building was constructed at a
cost of P5,000,000 plus excavation fee P50,000, architect fee P80,000 and building
permit P70,000.
Land 2/3 x 4,500,000 3,000,000
Building 1/3 x 4,500,000 1,500,000

Land 3,000,000
Building 1,500,000
Cash 4,500,000

Loss 1,500,000
Building 1,500,000

Building 1,500,000 – 1,500,000 + 100,000 + 5,000,000 + 50,000 + 80,000 + 70,000 =

5,300,000

 The third piece of land was acquired for P2,000,000 and was held for undetermined use.
This land is an Investment Property; not PPE.

1. ) What total cost of land should be reported in the statement of financial position under
property, plant and equipment? 7,000,000

2. ) What is the cost of new building? 5,300,000

11. Schubert Company incurred the following costs during the current year in relation to
property, plant and equipment:
Cash paid for purchase of land purchased 2,500,000 L
Mortgage assumed on the land purchased, including interest accrued 1,000,000 L
Realtor commission 300,000 L
Legal fees, realty taxes and documentation expenses 50,000 L
Amount paid to relocate persons squatting on the property 100,000 L
Cost of tearing down an old building on the land to make room for
Construction of new building 200,000 B
Salvage value of the old building demolished 50,000 -B
Cost of fencing the property after completion 110,000 LI
Amount paid to the contractor for the building constructed 5,000,000 B
Building permit fee 50,000 B
Excavation 50,000 B
Architect fee 200,000 B
Interest that would have been earned had the money used
during the period of construction been invested ignore 150,000
Invoice cost of machine acquired 2,000,000 M
Freight, unloading and delivery charges 60,000 M
Custom duties and other charges 140,000 M
Allowances and hotel accommodation, paid to foreign technicians
during installation and test run of machine 400,000 M

1. ) What amount should be capitalized as cost of land? 3,950,000

2. ) What amount should be capitalized as a cost of building? 5,450,000

3. ) What amount should be capitalized as cost of machine? 2,600,000