Property Acquisition and Cost Recovery
Chapter 9
Property Acquisition and Cost Recovery
SOLUTIONS MANUAL
Problems
39. [LO 1] Jose purchased a delivery van for his business through an online auction. His winning bid for the van was $24,500. In addition, Jose incurred the following expenses before using the van: shipping costs of $650; paint to match the other fleet vehicles at a cost of $1,000; registration costs of $3,200 which included $3,000 of sales tax and a registration fee of $200; wash and detailing for $50; and an engine tune-up for $250. What is Jose’s cost basis for the delivery van?
$29,150, cost basis in the delivery van, computed as follows:
Description
Amount
Explanation*
Purchase price
$24,500
Shipping costs
650
Business preparation cost
Paint
1,000
Business preparation cost
Sales tax
3,000
Business preparation cost
Total cost basis
$29,150
*Note that the registration fee, washing and detailing, and engine tune-up are costs for repairs and maintenance that are not required to be capitalized.
40. [LO 1] Emily purchased a building to store inventory for her business. The purchase price was $760,000. Beyond this, Emily incurred the following necessary expenses to get the building ready for use: $10,000 to repair the roof, $5,000 to make the interior suitable for her finished goods, and $300 in legal fees. What is Emily’s cost basis in the new building?
$765,300 cost basis, computed as follows:
Description
Amount
Explanation
Purchase price
$760,000
Improvements
5,000
Business preparation costs
Legal fees 300
Business preparation costs
Cost basis in building
$765,300*
*Note that the $10,000 repair for the roof was not capitalized. The repair is likely a routine maintenance expenditure rather than a capitalized cost. However, if the expense improved or prolonged the life of the asset beyond what would be considered maintenance to keep it in its working condition, it would be capitalized.
42. [LO 1] Brittany
Property Acquisition and Cost Recovery
SOLUTIONS MANUAL
Problems
39. [LO 1] Jose purchased a delivery van for his business through an online auction. His winning bid for the van was $24,500. In addition, Jose incurred the following expenses before using the van: shipping costs of $650; paint to match the other fleet vehicles at a cost of $1,000; registration costs of $3,200 which included $3,000 of sales tax and a registration fee of $200; wash and detailing for $50; and an engine tune-up for $250. What is Jose’s cost basis for the delivery van?
$29,150, cost basis in the delivery van, computed as follows:
Description
Amount
Explanation*
Purchase price
$24,500
Shipping costs
650
Business preparation cost
Paint
1,000
Business preparation cost
Sales tax
3,000
Business preparation cost
Total cost basis
$29,150
*Note that the registration fee, washing and detailing, and engine tune-up are costs for repairs and maintenance that are not required to be capitalized.
40. [LO 1] Emily purchased a building to store inventory for her business. The purchase price was $760,000. Beyond this, Emily incurred the following necessary expenses to get the building ready for use: $10,000 to repair the roof, $5,000 to make the interior suitable for her finished goods, and $300 in legal fees. What is Emily’s cost basis in the new building?
$765,300 cost basis, computed as follows:
Description
Amount
Explanation
Purchase price
$760,000
Improvements
5,000
Business preparation costs
Legal fees 300
Business preparation costs
Cost basis in building
$765,300*
*Note that the $10,000 repair for the roof was not capitalized. The repair is likely a routine maintenance expenditure rather than a capitalized cost. However, if the expense improved or prolonged the life of the asset beyond what would be considered maintenance to keep it in its working condition, it would be capitalized.
42. [LO 1] Brittany