Cala Manufacturing purchases a large lot on which an old building is located as part of its plans to build a new plant. The negotiated purchase price is $236,000 for the lot plus $131,000 for the old building. The company pays $26,500 to tear down the old building and $39,174 to fill and level the lot. It also pays a total of $1,786,153 in construction costs—this amount consists of $1,680,100 for the new building and $106,053 for lighting and paving a parking area next to the building.

Prepare a single journal entry to record these costs incurred by Cala, all of which are paid in cash.

Dr Lot Asset                 $432,674

Dr Lot Improvement    $106,053

Dr New Building          $1,680,100

Cr Cash Asset                            $2,218,827

Explanation:

Cala must record the land cost, the improvement in the land and the cost of new building.

The actual cost of land is calculated as under:

Purchase price of Land                       $236,000

Purchase Price of Old Building           $131,000

Building Tear down Cost                     $26,500

Filling and leveling cost                       $39,174    

Total Cost of Land                               $432,674

The old building cost and building tear down cost are the cost that are incurred to bring the asset to ready for use and according to the International Accounting Standard IAS 16 Property, Plant and Equipment, the cost incurred to bring the asset to ready for use position must be capitalized.

Now

The cost of improvement of the lot includes the expenditure of $106,053 for the lightning and paving of a parking area.

The cost of the new building must be capitalized as a new building which is $1,680,100.

So we have paid for preparing three assets, one is the lot, second one is the improvement of the lot and the third one is the new building. So the double entry would be:

Dr Lot Asset                 $432,674

Dr Lot Improvement    $106,053

Dr New Building          $1,680,100

Cr Cash Asset                            $2,218,827