George Company purchased land for use as its corporate headquarters. A small factory that was on the land when it was purchased was torn down, and before the new building’s foundation could be constructed, a substantial amount of rock had to be blasted and removed. Because the office building is set back on the land far from the public road, George had the contractor construct a paved road from the public road to the parking lot of the office building.
Three years after the office building was occupied, George added four stories to the office building. The four stories had an estimated useful life of five years more than the remaining estimated life of the original building.
Ten years later, the land and buildings were sold at an amount more than their net book value, and George had a new office building constructed in another state for use as its new corporate headquarters.
a. Which of the preceding expenditures should be capitalized? How should each be depreciated or amortized? Discuss the rationale for your answers.
b. How would the sale of the land and building be accounted for? Include in your answer how to determine the net book value at the date of sale. Discuss the rationale for your answer.