Case 7-2 Joan Holtz
1. a) Architects’ fees: capitalized
b) Snow removal costs: capitalized
c) Cash discounts earned: capitalized
d) The cost of building a combined construction office and toolshed: capitalized
e) Interest on money borrowed to finance construction: capitalized
f) Local real estate taxes: capitalized
g) Cost of mistakes: expensed
h) Overhead costs capitalized
i) Insurance & non-covered by insurance costs: expensed
2. a) Firstly, we need to match its depreciation to revenue still being earned from the theater, small stores, and apartment buildings, until the building gets razed. This demonstrates that Archer Company’s intentions when purchasing the land and buildings, was to raze the old building and construct a combined hotel and office building and earn their intended revenue. They cannot however, spread the cost of razing over the remaining life of the old buildings because that would imply that Archer Company’s intentions of purchase was to earn revenue from these buildings at the time of purchase, rather than demolishing and constructing the hotel and offices.
b) The intention the company had in mind for the buildings was to demolish them so they could use the land to build the hotel and office. The cost of a parcel of land includes the cost of grading or tearing down existing structures so as to make the land ready for its intended use. Demolishing costs should be allocated to cost of land.
c) The accounting treatment would differ as the cost of demolishing would be with following the book value. When the old building is being demolished, the net book value of the building would be written off. Keep in mind that the construction costs and demolition costs are accounted for in the same way by either company. On one hand, the cost of building the new building would be less costly to the single company, in comparison with Archer Company, because the costs are related to net book value, which is less than the price paid by Archer Company. Archer
b) Snow removal costs: capitalized
c) Cash discounts earned: capitalized
d) The cost of building a combined construction office and toolshed: capitalized
e) Interest on money borrowed to finance construction: capitalized
f) Local real estate taxes: capitalized
g) Cost of mistakes: expensed
h) Overhead costs capitalized
i) Insurance & non-covered by insurance costs: expensed
2. a) Firstly, we need to match its depreciation to revenue still being earned from the theater, small stores, and apartment buildings, until the building gets razed. This demonstrates that Archer Company’s intentions when purchasing the land and buildings, was to raze the old building and construct a combined hotel and office building and earn their intended revenue. They cannot however, spread the cost of razing over the remaining life of the old buildings because that would imply that Archer Company’s intentions of purchase was to earn revenue from these buildings at the time of purchase, rather than demolishing and constructing the hotel and offices.
b) The intention the company had in mind for the buildings was to demolish them so they could use the land to build the hotel and office. The cost of a parcel of land includes the cost of grading or tearing down existing structures so as to make the land ready for its intended use. Demolishing costs should be allocated to cost of land.
c) The accounting treatment would differ as the cost of demolishing would be with following the book value. When the old building is being demolished, the net book value of the building would be written off. Keep in mind that the construction costs and demolition costs are accounted for in the same way by either company. On one hand, the cost of building the new building would be less costly to the single company, in comparison with Archer Company, because the costs are related to net book value, which is less than the price paid by Archer Company. Archer