Calculating the Cost of Land and Building for Falcon Waste Management

What are the amounts that Falcon Waste Management should capitalize as the cost of the land and the building?

Understanding Capitalization of Costs

Capitalization of costs involves recording certain expenditures as assets on the balance sheet instead of recognizing them as expenses on the income statement. This is done when the costs incurred are expected to provide future economic benefits to the entity.

When Falcon Waste Management purchased the land and the warehouse, the total acquisition cost amounted to $770,000. In addition to this purchase price, Falcon incurred additional expenses such as the broker's commission, title insurance, and miscellaneous closing costs. These costs are directly related to the acquisition of the land and are therefore capitalized as part of the cost of the land.

However, the cost of demolishing the warehouse at $35,000 is not considered a cost of the land or the building. Instead, it is expensed in the current period because it does not add value to the future economic benefits of the acquired assets.

By capitalizing the costs of the land and the related acquisition expenses, Falcon Waste Management ensures that the total cost of the land and future building construction is accurately reflected on its balance sheet. This helps in providing a more accurate representation of the company's assets and financial position.

It is essential for businesses to carefully consider which costs should be capitalized and which should be expensed to ensure compliance with accounting standards and to provide users of financial statements with reliable information about the company's financial health.