CHAPTER

BLUE NOTES
17 S
L
CAPITALIZABLE COSTS

Land Building Machinery

Purchased Constructed
a. Purchase price a. Purchased price a. Material used, labor a. Purchase price
b. Attorney’s fees and other b. Legal fees and other employed and b. Freight, handling,
expenditures for expenses incurred in overhead directly storage and other
establishing clean titles connection with the attributable to cost related to the
c. Broker’s commission purchase construction acquisition
d. Escrow fees c. Unpaid taxes up to b. Building permit or c. Insurance while in
e. Fees for registration and the date of purchase license transit
transfer of title assumed by the buyer c. Architect fee d. Installation cost,
f. Cost of relocation or d. Interest, liens and d. Superintendent fee including site
reconstruction of other encumbrances e. Cost of excavation preparation and
property belonging to assumed by the buyer f. Cost of temporary assembling
others in order to acquire e. Payments to tenants building used as e. Cost of testing and
possession to induce them to construction office trial run, and other
g. Mortgages, vacate the building and tools or materials cost necessary in
encumbrances and purchased shed preparing the
interest on such f. Any renovating or g. Expenditures incurred machinery for use
mortgages assumed by remodeling costs during the f. Initial estimate of
the buyer incurred to put the construction period cost of dismantling
h. Unpaid taxes up to date building purchased in such as borrowing and removing the
of acquisition assumed by a condition suitable cost and insurance machinery and
the buyer for its intended use, h. Expenditures for restoring the site on
i. Cost of survey such as lighting service equipment and which it is located,
j. Cost of clearing, grading installations, fixtures made a for which the entity
demolishing unwanted partitions and repairs permanent part of the has a present
old building, less structure obligation
proceeds from salvage i. Cost of temporary g. Fee paid to
k. Payments to tenants to safety fence around consultants for
induce them to vacate construction site and advice on the
the premises cost of subsequent acquisition of
l. Cost of permanent thereof. However, the machinery
improvements, cost of construction of h. Cost of safety rail
grading, leveling, and permanent fence and platform
landfill after the completion surrounding machine
m. Cost of option to buy the of the building is i. Cost of water device
acquired land. If the land recognized as land to help machine cool
is not acquired, the cost improvement j. Irrecoverable
of option is expensed j. Safety inspection fees purchase tax
outright
Practical Accounting 1 Theory of Accounts
Chapter 17 – Land, Building, Machinery USL Blue Notes 65

Classification of Land in the Statement of Financial Position

1. Land used as plant site - property, plant and equipment
2. Land held for currently undetermined used - investment property
3. Land held definitely as future plant site-owner occupied (PPE)
4. Land held for long-term capital appreciation-investment property
5. Land held for current sale by a real estate developer-inventory

Accounting Treatment for Land Improvements

 If the cost is not subject to depreciation-charged to land account
Example: cost of surveying cost of clearing
cost of grading, leveling and landfill other cost of permanent improvement
cost of subdividing
 If the cost is depreciable-charged to land improvements
Example: fences water systems drainage
systems sidewalks pavements
cost of trees, shrubs and other landscaping

Treatment of Other Expenditures Incurred During the Construction of Building

 If part of blueprint-capitalize as cost of building (e.g. sidewalks, parking lots, pavements and driveways )
 If incurred not in connection with the construction of building-charged to land improvements
 If installed during construction- capitalize as cost of building(e.g. ventilating system, lighting system and
elevator)
*otherwise charged to building improvements and depreciated over their useful life or life of the building
whichever is lower
 If immovable or attached to building and removal will destroy the building-capitalize
 If movable-charged to furniture and fixture and depreciated over its useful life

Capital Expenditure Revenue Expenditure

 expenditure that benefits both current and future  expenditure that benefits only the current period
periods  reported as outright expense
 reported as an asset

Subsequent cost incurred for PPE shall be recognized as an asset if it:

 Extends the life of the asset
 Increase the capacity of the asset and quality of output
 Improve the efficiency and safety of the asset
Note: If the subsequent cost merely maintains the existing level of performance, the cost should be expensed when incurred.

Theory of Accounts Practical Accounting 1

66 USL Blue Notes Chapter 17 – Land, Building, Machinery

Other Subsequent Expenditures

Expenditures Treatment

Additions – represents major expenditures for new  Capitalized as cost of asset

assets

Improvements or Betterments – modifications or  Normally capitalized

alterations which increase the service life or the
capacity of the asset
Accumulated depreciation of the old part are
derecognized
Note: improvement that do not involve
replacement of parts are simply added to the
cost of existing asset

Replacements – involve substitution  Capitalized when there is major replacement

new asset is not better than the old  Expensed if it is minor replacement
asset when acquired

Extraordinary repairs  Usually capitalized

Ordinary repairs  Expensed outright

Rearrangement cost  Capitalized if it increases the future service

potential of the asset and expensed if it
merely maintains the existing level of
performance of the asset

Practical Accounting 1 Theory of Accounts