Chapter 1.2® - Types of Capital Assets - Land, Land Improvements, Buildings & Leasehold Improvements, Lump Sum Capital Asset Purchases
When a company purchases land for use in its operations, this cost includes the total amount paid for the land, + any real estate commissions, title insurance, lawyer fees as well as any accrued property taxes paid by the buyer. Other included costs are:
- Other assessments by the local municipal government including roadways, sewers and sidewalks. These assessments could occur at the time of purchase of the land or any time after. They are added to the cost of the land because they permanently increase its value. Land that is purchased with a building site sometimes includes a building or other obstructions that must be removed before the land becomes available for use. In this case, the total purchase price is charged to Land + cost of removing building/obstructions minus sale price of salvaged materials.
An example would best explain the acquisition costs of land. Assume FIDO Corp purchased land to open its new retail store for $185,000. This land contained an old service garage that is removed at a total cost of $25,000 minus $6000 raised through sale of salvaged garage materials. Further, total closing costs included $7000 real estate commissions, $2000 lawyer fees as well as title costs of $500. Thus, what is the total cost of acquisition of this land? This is calculated as follows:
ii) Land Improvements
Since land has an unlimited life
and cannot be “consumed”, it is not subject to amortization.
However, land improvements such as driveways, parking lots, lighting systems,
parking space white lines, etc are subject to amortization. Since these
costs increase the usefulness of the land, they are charged to a separate
asset account known as Land Improvements. This is done so as to be able
to allocate their costs in the periods they benefit.
Accounting systems use building as a long term asset when the costs of purchasing or constructing a building are incurred. Common costs included in the price of the building when it is purchased include purchase price + taxes + title fees + legal costs + real estate commissions. Other costs included are those costs incurred to bring the building ready for its intended use including renovations such as flooring, wall coverings, lighting, wiring and other miscellaneous repairs.
When a corporation builds its own buildings, other costs included are cost of raw materials used, labour plus a reasonable amount of amortization on machinery, power, heat, lighting, etc. Also included are costs of building permits, municipal lobbying, and insurance during construction as well as architect & design fees.
iv) Leasehold Improvements
To understand leasehold improvements, here are a few terms you need to know. A lease is when a building or property is rented under a contractual agreement where the property owner grants the lease and is called the Lessor. The person who secures the right to possess and use the property is called the Lessee. Over the life of the lease, the lessee is sometimes required to pay for useful leasehold improvements such as flooring, painting, storefronts, wall covers, etc. These value-added improvements to the building revert back to the Lessor at the end of the life of the lease. The costs of such improvements are Debited to the Leasehold Improvements account and amortized over their useful life.
Lump Sum Capital Asset Purchases
Purchase of lump-sum Capital assets, also known as a basket purchase, is the purchase of capital assets in a group, with 1 single transaction and 1 lump-sum buying price. For instance, a company could purchase land appraised at $500,000, land improvements (parking lots or driveways) at $150,000 and a building appraised at $2 million for a total of $2 million. If this happens, accountants allocate the cost of the purchase among the different types of assets acquired based on their relative and total market values.