Which of the following expenditures related to land should be capitalized as part of the land's cost on the balance sheet?

• A. Cost of landscaping after the building is in use
• B. Interest paid on a loan after construction is complete
• C. Cost of clearing and grading the land
• D. Annual property taxes on the land

Answer: (C)

Verified step by step guidance

1. Understand the concept of capitalization: Capitalization involves recording an expenditure as an asset on the balance sheet rather than as an expense on the income statement. For land, only costs that prepare the land for its intended use are capitalized.
2. Review the expenditures listed in the problem: Analyze each item to determine whether it contributes to preparing the land for its intended use or is an ongoing expense.
3. Evaluate 'Cost of landscaping after the building is in use': Landscaping after the building is in use is considered an improvement or maintenance expense and is not capitalized as part of the land's cost.
4. Evaluate 'Interest paid on a loan after construction is complete': Interest paid after construction is complete is considered a financing cost and is expensed, not capitalized as part of the land's cost.
5. Evaluate 'Cost of clearing and grading the land': Clearing and grading the land are necessary to prepare the land for its intended use, so these costs are capitalized as part of the land's cost on the balance sheet.