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Hello Tutor,
I have a question related to the following question. How can the solution include in the calculation of the building cost the costs of purchasing piece of land? It’s wierd as piece of land is another asset that cannot be depreciation. When we include it in the cost of building, how can we depreciate it later?
Thank you!
An entity started construction on a building for its own use on 1 April
20X7 and incurred the following costs:
$000
Purchase price of land 250,000
Stamp duty 5,000
Legal fees 10,000
Site preparation and clearance 18,000
Materials 100,000
Labour (period 1 April 20X7 to 1 July 20X8) 150,000
Architect’s fees 20,000
General overheads 30,000
–––––––
583,000
–––––––
The following information is also relevant:
• Material costs were greater than anticipated. On investigation, it was
found that materials costing $10 million had been spoiled and
therefore wasted and a further $15 million was incurred on materials
as a result of faulty design work.
• As a result of these problems, work on the building ceased for a
fortnight during October 20X7 and it is estimated that approximately
$9 million of the labour costs relate to this period.
• The building was completed on 1 July 20X8 and occupied on 1
September 20X8.You are required to calculate the cost of the building that will be included in tangible non-current asset additions.
You are correct that land is not depreciated as it has an infinite life but it is still capitalised as part of the cost of the non-current asset (PPE). Without the land then we cannot have the building that sits upon it, so the land is helping the business generate future economic benefits and hence is capitalised.
Thanks
Hello tutor.
Thank you so much for your explanation!
I totally agree with you that the capitalisation of land is necessary. So it means that at year end, we depreciate the building cost, to which the land cost belongs?
I just thought that land price will be capitalised as one item in Non-current assets of balance sheet and seperated from the building cost. Is it correct?
Thank you tutor!
Yes, the land and buildings will be capitalised as one on the SFP but then when calculating the depreciation we just need to ensure that we only depreciate the buildings.
Thanks
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