FAR · Select balance sheet accounts · 6 practice questions
Land vs. Land Improvements: Demolition and Building Costs
Land includes acquisition and permanent site-preparation costs; finite-life site improvements and building construction are capitalized separately. Below, sort Lark's new-office site costs, including a structure acquired solely to demolish, then try free practice questions.
Try one first
Hint
Separate costs that become part of nondepreciable land from costs related to improvements with their own limited useful lives.
Answer C. Costs necessary to acquire land and ready it for its intended use are capitalized to the land account, including the purchase price, title and legal fees, and the net cost to demolish an acquired structure. Here the net demolition cost is $35,000 ($40,000 demolition less $5,000 salvage). The parking lot is a separate land improvement with a limited useful life and should be capitalized separately and depreciated.
Why not A: This overgeneralizes site-preparation costs. While purchase-related costs and net demolition belong in land, the parking lot has a finite useful life and should be recorded as a depreciable land improvement, not as nondepreciable land.
Why not B: This distractor incorrectly treats demolition clearing as a depreciable land improvement. Demolition costs incurred to clear the site of an unwanted structure are part of the land cost (net of salvage) and are not depreciated; only improvements with limited useful lives (like a parking lot) are depreciable.
Why not D: Expensing the demolition is incorrect because demolition was necessary to ready the land for its intended use; the net demolition cost is capitalized to land. Also, the parking lot should be capitalized as a separate land improvement and depreciated.
Sort it
Does the cost acquire or permanently prepare the site itself, rather than construct a building or a finite-life improvement?
Does the cost create a separate site improvement with a limited useful life?
Does the cost directly relate to constructing the new office building?
| Item | Goes to |
|---|---|
| Property purchase price, including the old structure acquired solely to demolish | LandThe old structure has no separate intended benefit. The full purchase price goes to Land. |
| Employee parking lot paving expected to last 10 years | Land ImprovementsThe paving wears out and needs replacement. Its cost is capitalized separately and depreciated. |
| Excavation specifically for the new office building's foundation | BuildingThis excavation serves the building's foundation, not the site generally. |
| Seller's delinquent property taxes assumed and paid at closing | LandPaying the seller's existing tax obligation is part of acquiring the property, not a current-period tax expense. |
| Parking-area lighting expected to need replacement in 10 years | Land ImprovementsThe lighting has a finite useful life separate from the land. |
| Demolition: $40,000 cost less $5,000 salvage | LandThe $35,000 net cost clears the unwanted structure from the land. It is not a new building cost. |
| Architect fees for designing the new office building | BuildingThe design work directly relates to constructing the building. |
| General clearing, grading, and fill, unrelated to the foundation or parking lot | LandThis work permanently prepares the site itself. It does not create a separate depreciable improvement. |
| Perimeter fence with an estimated 15-year life | Land ImprovementsAttachment to the land does not control classification. The fence has a limited useful life. |
| City assessment for a permanent public sewer line benefiting the site | LandThe permanent public improvement benefits the land indefinitely, so the assessment increases Land. |
| Permit for construction of the new office building | BuildingThe permit is directly attributable to constructing the building. |
| Title, legal, and recording fees for the site purchase | LandThese are acquisition costs of the site. The old structure was not acquired as a separate usable asset. |
| Payment to permanently relocate an easement so the site can be used as planned | LandThe payment permanently makes the land usable for its intended purpose. |
Key points
- Remember: Preparing the site itself goes to Land; adding something that wears out goes to Land Improvements.
- Salvage proceeds reduce the demolition cost capitalized to Land. They are not separate income.
- Allocate a combined purchase price by relative fair values when land and building are separate assets with intended economic benefits.
- Land is not depreciated; Land Improvements and Building are depreciated over their useful lives.
How the exam traps you
- Putting parking lots and outdoor lighting in Land because they are attached to the site. Capitalize finite-life site improvements separately and depreciate them.
- Allocating purchase price to an appraised old building acquired solely to demolish. With no separate intended benefit from the building, the full property purchase price goes to Land.
- Adding gross demolition cost to Land and recording salvage proceeds as income. Subtract salvage proceeds from demolition cost before adding the net amount to Land.
Question 2
| Asset / Expenditure | Amount |
|---|---|
| Purchase price of tract and shed | $1,500,000 |
| Legal, title, and recording fees | $28,000 |
| Demolition of shed | $74,000 |
| Salvage proceeds from shed materials | $9,000 |
| General clearing, filling, and permanent grading of the tract | $61,000 |
| Asphalt paving, striping, and lighting for customer parking areas | $132,000 |
| Perimeter fencing around the paved lot | $37,000 |
| Municipal special assessment for a permanent public sewer extension serving the tract | $24,000 |
Hint
Separate costs that create a depreciable site asset from costs that merely acquire or ready the land itself for its intended use.
Answer B. Land improvements are depreciable site improvements with finite useful lives. The asphalt paving, striping, and parking-area lighting ($132,000) plus the perimeter fencing ($37,000) are land improvements, totaling $169,000. Items that ready or acquire the land itself (the general grading and the permanent sewer special assessment) and the net cost to demolish the shed are capitalized to land, not to land improvements.
Why not A: Tempting because the sewer assessment benefits the site, but a permanent special assessment that enhances the land itself is generally capitalized to land rather than to depreciable land improvements; adding the $24,000 sewer assessment to the $169,000 land-improvement subtotal yields $193,000 (incorrect classification).
Why not C: This reflects the common error of treating general clearing, filling, and permanent grading as a depreciable land improvement. Because the stem specifies that grading did not relate to the parking lot or building foundation, that $61,000 is part of land, not land improvements; $169,000 + $61,000 = $230,000 (incorrect).
Why not D: This combines both misclassifications, treating the permanent sewer assessment and the general grading as land improvements. Both items enhance or ready the land itself and therefore belong in land, not depreciable land improvements, so including both yields $254,000 (incorrect).
Question 3
Hint
Focus on whether the cost prepares the land itself for use or creates a separate improvement with a limited useful life.
Answer D. Site grading and clearing are costs incurred to get the land ready for its intended use, so they are capitalized to the Land account. Land has an indefinite life and is not depreciated, which distinguishes it from land improvements that have limited useful lives.
Why not A: A fence enhances the property but has a determinable useful life, so it is recorded as a land improvement and depreciated over its useful life rather than included in the Land account.
Why not B: Tempting because the parking lot is attached to the property, but a paved parking lot has a limited useful life and is classified as a land improvement, which is depreciated separately rather than capitalized to Land.
Why not C: Routine maintenance after the asset is ready for use does not provide future economic benefits beyond the current period and is expensed as incurred, not capitalized to Land.
Question 4
Hint
Decide which costs are required to ready the land for its intended use (capitalize to Land) and which are separate, depreciable improvements; remember to net salvage proceeds against demolition costs.
Answer B. Costs necessary to acquire and ready land for its intended use are capitalized to Land: purchase price ($500,000) + closing ($20,000) + legal ($5,000) + demolition net of salvage ($60,000 − $10,000) = $575,000. The parking lot and landscaping are depreciable Land Improvements and are capitalized separately: $140,000 + $25,000 = $165,000.
Why not A: This treats the demolition cost as fully added to Land while posting the salvage proceeds to income. GAAP requires netting salvage against demolition/site-preparation costs when capitalizing, so Land should be $575,000, not $585,000.
Why not C: This lumps the parking lot ($140,000) into Land and leaves only landscaping as a Land Improvement. Under U.S. GAAP the parking lot and landscaping are separate, depreciable land improvements and should be capitalized to Land Improvements, not to Land.
Why not D: This excludes demolition costs from Land (capitalizing only acquisition fees). When demolition is necessary to ready the land for its intended use, the net demolition cost (demolition less salvage) is capitalized to Land; excluding it understates Land.
Question 5
Hint
Focus on the buyer's intent at the time the property was acquired and which asset is being readied for use.
Answer B. Costs incurred to ready land for its intended use at acquisition, such as demolition of existing structures when the buyer intends to remove them, are capitalized as part of the land basis. Here the net demolition cost is $60,000 less $10,000 salvage = $50,000, which is capitalized to land. Land improvements (the future parking lot) are accounted for separately and typically depreciated.
Why not A: Tempting because the site will become a parking lot (a land improvement), but the demolition cost is incurred to acquire and prepare the land itself and therefore attaches to the land basis rather than to later land improvements.
Why not C: Incorrect because West never intended to use the warehouse as a building asset; the structure was removed as part of preparing the land, so the cost is not part of a depreciable building account.
Why not D: Incorrect since demolition performed to prepare purchased land for its intended use is capitalized to the land basis. Demolition would be expensed only if it were a routine cleanup not tied to acquiring or readying the asset for use.
Question 6
Hint
Focus on which acquisition and site-preparation costs are necessary to get the land ready for its intended use, and remember how salvage affects demolition costs.
Answer A. Costs necessary to acquire land and prepare it for its intended use are capitalized. Include the purchase price, legal/title fees, seller's delinquent property taxes assumed by the buyer, and demolition costs net of any salvage: 900,000 + 45,000 + 18,000 + (70,000 − 9,000) = 1,024,000.
Why not B: This reflects including the purchase price, legal fees, and the net demolition cost but omitting the seller's delinquent property taxes. Because Norwood paid the seller's outstanding taxes to acquire the property, those taxes are capitalized to land.
Why not C: This reflects capitalizing the full demolition cost without reducing it for the $9,000 salvage proceeds. Salvage from demolition reduces the amount capitalized to land when the building is acquired with the intent to demolish it.
Why not D: This reflects including the purchase price, legal fees, and assumed taxes but excluding the demolition cost. When a building is acquired with the intent to demolish it to prepare the site, the net demolition cost is part of the land's initial carrying amount.
Common questions
Are demolition costs capitalized to land or building?
When a structure is acquired solely to demolish and has no separate intended use, demolition net of salvage goes to Land. This remains true even if the cleared site will become a parking lot.
Is a parking lot land or a land improvement under GAAP?
A parking lot with a finite useful life is a Land Improvement. Capitalize it separately and depreciate it, rather than including it in nondepreciable Land.
When do you allocate a purchase price between land and building?
Use relative fair values when land and building are separate assets with intended economic benefits, including resale. If the building has no separate intended use and is acquired solely to demolish, put the full property price in Land.
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