Question

Rolling Fields Retirement Homes purchased land to use for a planned assisted-living community. As a condition of the sale, a title search had to be performed and a survey completed. Rolling Fields incurred both these costs. In order to prepare the land for new construction, a barn that was on the land when it was purchased had to be torn down, and a rocky hill in the middle of the property had to be levelled. A series of streets, sidewalks, water mains, storm drains, and sewers through the planned community also had to be constructed. Finally, street lighting had to be installed and green spaces for recreation and rest had to be landscaped.
The year after the land was purchased, construction of new homes began. The homes are to be owned by Rolling Fields and will be rented on a long-term basis to elderly residents who no longer feel they can live completely on their own but do not yet need nursing home care. Rolling Fields will be responsible for all the maintenance and repair costs associated with the properties. By the end of the year, Phase 1 was complete and 30 homes had been constructed and were occupied. The average cost of each home was $180,000.
In the first year, repair and maintenance costs averaged $1,200 per property. The company also borrowed $4 million to finance the construction of the homes. Interest on the loan for the year was $308,000.
Required:
a. Determine which of the above expenditures should be capitalized.
b. For the expenditures that should be capitalized, identify the appropriate account to which the costs should be charged.
c. For the expenditures that should be capitalized, discuss how each asset class should be depreciated.


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  • CreatedJune 11, 2015
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