Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

ANALYSIS OF MULTIPLE-CHOICE TYPE QUESTIONS

1. (L.O. 1) The Jupiter Company purchased a parcel of land to be used as the site of a new office complex. The following data pertain to the purchase of the land and the beginning of construction for the new building:

   Purchase price of land	$200,000
   Attorney's fees for land transaction	1,000
   Title insurance cost	2,000
   Survey fees to determine the boundaries of the lot	800
   Excavation costs for the building's foundation	8,000
   Costs of clearing and grading the land	1,400

   The total acquisition cost of the land is:

   1. $213,200.
   2. $205,200.
   3. $203,800.
   4. $202,400.
   5. $200,000.

   Approach and Explanation: Think about how the cost of land is determined: an asset's cost includes all costs necessary to acquire the asset and get it to the location and condition for its intended purpose. When land has been purchased for the purpose of constructing a building, all costs incurred up to the excavation for the new building are considered land costs. Think of the common components of land cost (refer to the listing in Illustration 9-1). The cost is computed as follows:

   

   The $8,000 excavation costs for the building's foundation should be charged (debited) to the Building account. (Solution = b.)

2. (L.O. 1) The Venus Company hired an architect to design plans and a construction firm to build a new office building on a parcel of land it owns. The following ...