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Initial Cost of Land

Brian Krogol
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Alright, let's start a discussion on the initial cost of land. So land, remember this is just the land itself, nothing on the land. So if you bought an acre of land, we're talking about just the land. Okay. So the land is often purchased as the building site, right? This is where we're gonna build something generally and we'll build a factory or an office on the land. So the cost of the land, remember it doesn't just include the purchase price, but every necessary expenditure to make it ready for use. So what could that include? Well, let's start there with the purchase price. And sometimes we pay with cash, but we can also take out a loan, right? Maybe we'll get a loan from the bank to pay for for the for the land or maybe we'll raise some equity and we'll have common stock that we used to pay for the land. So generally what you'll see is a note payable. Maybe you'll have cash along with a note payable. Okay, So that that's gonna be definitely part of the purchase price of the land. But what about some of these weird things? These are gonna be those necessary expenditures. These are the ones they like to use in your class, you'll see closing costs related to titles or attorney fees, right? You have to pay some title, search costs, something like that. Real estate broker commission. If you have to pay any commissions. Well, that's going to be included in the initial cost of the land property taxes and leans that are assumed by the buyer, right? We're going to be the buyer in this case. So if we have to pay any leans that were on the property, this is like um taxes that were never paid before and now you have to pay them. Well, that's going to be included in that cost. Now this one's pretty interesting and I want you to know All right, this is one that they usually like to trick you with. So the cost of any old structures. So the cost of removing any old structures on the land, Right? Because let's say you're gonna build an office on the site, but there's like an old dilapidated building on the site that you have to get rid of. You can't build your office until that old building is gone. Well, it's not ready for use until that old building is gone. Right? So the cost of removing that old building, we gotta include that into the cost of the land, but usually when there's gonna be some old building on the site, we're gonna get some salvage value. Maybe we have scrap metal, maybe we can sell, you know, whatever we we demolish the building and we can sell some stuff from the building. We might get a little money back. Okay, So less any salvage value. All right. And then last but not least. I want to remind you here. Remember that land is not depreciated. This doesn't have to do with the initial cost of the land, but I just want to reiterate to you guys that land is not depreciated. It is the only fixed asset that we're not gonna be depreciating. Cool. Alright so let's jump right in here to an example and let's see how we can find the initial cost of this land. So the sexy times lingerie company S. T. L. C. Just purchased a plot of land to build its new edible underpants factory. Oh man when did I write this? S. T. L. C. Paid 40,000 in cash and signed a five year note payable for an additional 160,000 in closing the sale. S. T. L. C. Also paid 1500 in attorney fees and a broker's commission of 2500. Furthermore, the land housed a dilapidated warehouse that S. T. L. C. Removed for $12,000 while receiving $3000 from the scrap metal. After removing the warehouse. S. TLC paved a portion of the land as a parking lot at a cost of 15,000. So remember after all these numbers, what is the initial cost of the land? Okay so we're gonna be looking for that initial cost of the land and then we're gonna make the journal entry. The journal entry is gonna be pretty simple but let's go ahead. The tricky part is what is included in the cost of the land. Remember it's the cash we paid maybe any loans we took out and then all necessary expenditures to get it ready for use. So let's go ahead and start listing them out. So the land is gonna include. We've got the cash we paid, right? We paid 40,000 in cash, tells us right here, 40,000 in cash. And we signed a five year note payable for another 160,000. So the bank loaned us $160,000 that we put towards this uh towards this purchase of land. So the note payable, I'll put mp for note payable. That was another 160,000 That went into the cost of the land. Right. What else did we do? We had some other closing cost to write 1500 and attorney fees that we paid Broker's commission of 2500 if we didn't pay these. Well, we wouldn't get the land. Right? So let's add those in here to 1500. And I'll put attorney. Okay, Um broker was another 2500. The broker. And what else? So here's the tricky one. We've got the furthermore that the land house, the dilapidated warehouse. So there was this old building on the land and we couldn't build our factory until we got rid of this old warehouse. Right? So we removed it and it cost us $12,000. Right? So the warehouse Removal, it cost us $12,000 to remove the warehouse. But we received 3000 in return. Right? It cost us 12,000 but we received 3000 in return. So we got to take that out. Okay so that's gonna reduce the cost of the land and that was from the scrap metal. Right? The scrap metal got us $3000 back. So we take that out of the warehouse cost. Okay? And last but not least after removing the warehouse. S. T. L. C. Paved a portion of the land as a parking lot at a cost of 15,000. So what do you guys think about that one? Well that's a land improvement. Right? Remember when I talked about land, the land itself? Just the land, the acre of land that we bought? Well that's gonna be the land, anything we put on the land. Well that's either gonna be a building when we build the building or build the factory or it's gonna be a land improvement. When we're talking about parking lots or fence, anything like that, lighting fixtures. That's all gonna be land improvements. So that is not included in the cost of the land. We would still make an asset for that. But here we're specifically focused on the land, we're gonna focus on land improvements in the next video but here it's not included in the cost of the land. Okay, so let's go ahead and let's find out what the initial cost of the land is. Pull out a calculator. We had 40,000 in cash, 160,000 in notes payable. Uh 1500 attorney fees, broker commission 2,512,000 in warehouse, removing the warehouse. And then we're going to subtract 3000 from the scrap metal. We got Okay, so we end up with 213,000 is what we paid for the land, not just the cost of the land, but with all these necessary expenditures as well. Okay. So what's our journal entry gonna look like? Well, we're gonna debit land, right? Land is our asset. And we're going to debit it for the 213,000. Now it tells us we paid cash of 40,000, but we also paid cash for quite a few other things too. Right? We paid cash for the attorney fee, cash for the broker fee notice. We don't have an expense. We're not gonna have brokers expense. We're not gonna have attorney expense, nothing like that. All of those costs were saying they got capitalized. When we say something got capitalized, That means it got put into an asset account. Okay, so we capitalize these costs and we did it correctly through gap into the land account. So we did take out a note payable, right? We have a note payable and that's a liability. Right? We have a note payable for 160,000. So that is going to be a credit here. We're gonna have a credit To notes payable for 160,000. Oops, this is a credit 160,000. And then the rest of it. We paid in cash. Right? We paid the 40,000 in cash for the land. But we paid a bunch of other things in cash as well. These attorney fees, broker fees, removing the warehouse. So how much was that in total? I'm just gonna balance out this entry. 213,000 -160000. And that comes out to 53,000. Right? This 53,000. That should make sense. Right. This is gonna be this cash we paid here, attorney fee broker fee and then the things with the warehouse, that other 9000 to 12,000 minus 2, 3000. So there we go. That's our entry. We debit land, creating that asset for land and we're going to credit notes payable and credit cash. Cool. So that's that's about as tricky as these questions get. And generally when you deal with these types of questions, they're gonna stand alone. You're usually not gonna obviously with land we don't appreciate. But usually you're not gonna have to have this insane calculation for the cost and then be dipped appreciating when we're talking about a building or equipment. The question's gonna stand alone in your class. They're just gonna say, hey, what's the cost And they're usually not gonna go as intense as this. But if you could understand what we just went through. You're doing pretty good at this point. All right, let's go ahead and let's start talking about land improvements. Alright, let's do that in the next video. Yeah. Mhm.