Chapter 7, Problem 1QC

Smatter Corporation purchased land for a new building. Which of the following costs would not be included in the cost of the land?

  a.    Purchase price of the land

  b.    Cost of demolishing an old garage located on the land

  c.    Cost of a new parking lot constructed on the lane

  d.    Brokerage commission paid to the real estate agent who handled the land transaction

To determine

The costs which would not be included in the cost of the land.

Answer to Problem 1QC

The costs which would not be included in the cost of the land is option c. Cost of a new parking lot constructed on the land.

Explanation of Solution

Plant assets:

Plant assets refer to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.

Justification for incorrect answers:

Cost of land:

The amounts that should be recorded as a cost of a land are the total amount of expenditure that are incurred to acquire the land and to make it ready for use. The cost of land and building includes the following costs:

• Purchase price of land
• Demolishment cost of the old building on the land
• Attorney fees
• Real estate agent commission
• Title
• Recording fees
• Legal fees
• Additional expenses :
  • Clearing
  • Filling and leveling of land

Option a, b, and d:

The purchase price of the land, cost of demolishing an old garage located on the land, and brokerage commission paid to the real estate agent who handled the land transaction are the costs that would be included in the cost of the land. Hence, the options a, b and d are the incorrect answers.

Justification for the correct answer:

As the cost of a new parking lot constructed on the land is not the expenditure which is incurred to acquire the land and to make it ready for use, it would not be included in the cost of the land.

Therefore, option c. is the correct answer.