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Question 1) A company purchased land adjacent to its existing property to build a warehouse. The...

Question 1)

A company purchased land adjacent to its existing property to build a warehouse. The company's maintenance crew and additional temporary employees built the warehouse. In addition, the company took out a $40,000 construction loan, which was repaid with a new loan after construction was completed. Which of the following statements is true?

All costs associated with building the warehouse should be expensed as incurred.
Materials costs should be capitalized to the building account, but all labor and interest costs during construction should be expensed as incurred.
Labor and materials costs should be capitalized, but the interest costs during construction should be expensed as incurred.
Labor, materials, and interest costs during construction should be capitalized.

2)

The following expenditures where incurred by Corvallis Corporation in purchasing land:

Cash price $145,000
Past due property taxes $3,000
Attorneys' fees $2,500
Real estate broker's commission $8,000
Razing an old building on the property $6,500
Clearing and grading $3,500

What is the cost of the land?

$145,000
$158,500
$165,500
$162,000

$168,500

3)

Sunrise Company incurred the following expenditures in purchasing a truck :

Cash price $82,000
Sales tax 6,560
Accident insurance 2,000
Motor vehicle license 250
painting and lettering 600

What is the cost of the truck?

$88,560
$90,560
$89,410
$89,160
0 0
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Answer #1
  1. The correct answer is Option D.
    Explanation :
    All cost which are attributable to construction of the building, during the construction period is capitalized, whether it is material, labor or interest expense.
    Assumed- the interest expense is paid during the construction period.
  2. The correct answer is Option D.
    Explanation :
    The purchase cost will be distributed in the ratio of fair values of the assets acquired.
    Therefore, amount allocated to factory machinery is as follows :
    Factory Machinery = $1050000 * $220000 / ($125000 + $655000 + $220000)
    = $231000
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