PP&E Cost Basis

Question 1

When land has been purchased for the purpose of constructing a building, all costs incurred up to the excavation for the new building are considered land costs. All of the following expenditures are included:

Answer 1

Think - what do I need to add to the Balance Sheet to increase the value of the land?

• Purchase Price
• Brokers’ commissions
• Title and recording fees
• Legal Fees
• Draining of Swamps
• Clearing of brush and trees
• Site Development
• Existing obligations assumed by buyer, including mortgages and back taxes
• Costs of razing (tearing down) an old building (demolition)
• Less proceeds from sale of existing buildings, standing timer, etc.

Question 2

Land improvements are depreciable and include the following:

Answer 2

Fences
Water Systems
Sidewalks
Paving
Landscaping
Lighting

Question 3

Pass Key -
When preparing the land for construction of a building

Answer 3

Land Cost: Filling in a hole or leveling

Building Cost: digging a hole for the foundation

Question 4

Pass Key -

For the CPA Exam, it is important to remember two rules concerning capitalized interest:

Answer 4

Rule 1: Only capitalize interest on money actually spent, not on the total amount borrowed.

Rule 2: The amount of capitalized interest is the lower of:
- Actual Interest cost incurred, or
- Computed capitalized interest (avoidable interest)