Question

A company purchased land for $80,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the cost principle, the cost of land would be recorded at

a. $97,000
b. $80,000
c. $85,000
d. $92,000

Answer 1

The cost of the land would be recorded as $85,000, based on the cost principle.

Step-by-step explanation:

The cost of the land would be recorded as $85,000.

The cost of land includes the purchase price ($80,000) plus any additional costs directly related to acquiring and preparing the land for its intended use.

In this case, the real estate brokers' commission ($5,000) and the cost of demolishing the old building ($7,000) are both directly related to acquiring and preparing the land.

Therefore, the total cost of the land would be $80,000 + $5,000 + $7,000 = $92,000. However, according to the cost principle, only costs directly related to acquiring and preparing the land for its intended use should be included. Therefore, the cost of the land would be recorded as $85,000 ($80,000 + $5,000).