PROBLEMS Problem 26-1 (AICPA Adapted) At the beginning of current year, Basilan Company purchased for P4,500,000 a tract of land as a factory site. An existing building on the property was razed and construction began on a new factory building which was completed at year-end. Cost of razing old building 300,000 Title insurance and legal fees to purchase land 200,000 Architect fee 950,000 New building construction cost 8,000,000 Paving of street and sidwalk 100,000

1. What amount should be reported as cost of factory building?

a. 9,250,000 b. 9,450,000 c. 9,350,000 d. 9,150,000

2. What amount should be reported as cost of the land?

a. 4,700,000 b. 5,000,000 c. 4,500,000 d. 4,800,000 

Solution:-

1. Calculation of cost of factory building

Acquisition cost refers to amount spent on acquiring fixed assets (property, plant and equipment, land, investments etc.) and bringing them to in condition of working which includes purchase price, shipping, installation, insurance, non recoverable taxes and any other costs less discounts.

So, in given case

(I) Cost of razing building is capitalised as for construction of new building, old building needs to be razed out,

(II) Architect fees has been capitalised as same has been incurred for preparation of blueprint of building and other necessary services which are essential for construction of building.

(III) New Building construction cost and paving of street and sid walk are capitalised as same has been incurred for construction of building which is very essential for its existence.

= Cost of razing old building + Architect Fees + New Building construction cost + Paving of street and sid walk

= P 3,00,000 + P 9,50,000 + P 80,00,000 + P 1,00,000

= P 93,50,000

Correct answer is c. P 93,50,000

2. Calculation of cost of Land

Purchase price of land + Title insurance and legal fees to purchase land

= P 45,00,000 + P 2,00,000

= P 47,00,000

Therefore, correct answer is a) P 47,00,000