Kiro Corporation acquired a real estate located in Manila City at the beginning of 2020 for a
Question:
Kiro Corporation acquired a real estate located in Manila City at the beginning of 2020 for a total acquisition cost of P6M. 10% of the acquisition cost is attributed to an existing building that Kiro Corporation intends to demolish to give way to the construction of a new 20-story hotel building. The company incurred the following additional costs up to January of 2021 when it commenced the operation of the property:
Demolition costs | 90,000 |
Real property taxes covering the periods (2019 and 2020) | 60,000 |
Special assessment by the city government of Manila for road and sewerage improvements | 120,000 |
Real estate broker’s fees and commission | 80,000 |
Architects and Engineers' Fees | 200,000 |
Construction costs paid to a 3rd party contractor (Audit note A) | 5,000,000 |
Interest on loan incurred specifically to finance the construction (Audit note B) | 600,000 |
Audit notes:
- The construction commenced on March 1, 2020, where the term of payment to the construction company was 50% on March 1, 20% on August 1 with the balance upon completion on December 31, 2020.
- The construction loan was signed and the 6M proceeds were received in January 2020. The 3-year loan had a nominal interest of 10% payable annually every December 31.
- At the beginning of 2021, the company started operating the building as a hotel and casino. The first 4 floors of the building were leased out to an independent casino operator. Kiro Corporation has no further involvement in the Casino. The rest of the floors are operated by Kiro Corporation as a hotel.
- The building has an estimated 20-year useful life. By the end of 2021, the fair market values of the Land and Building were at P8M and 6M, respectively.
1. What is the initial cost of the Land?
2. What is the initial cost of the Building.
Principles of Accounting
ISBN: 978-1133626985
12th edition
Authors: Belverd E. Needles, Marian Powers and Susan V. Crosson