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I. (24 points) Sandhu Manufacturing Co. was organized as a corporation on January 2, 2023 at which time it began construction of its production facilities. The new factory was completed on September 30 and on October 1, 2023, operations began.

Requirements: Determine the correct balance on December 31, 2023 for the land and buildings accounts. You will need to compute two balances, one for land and one for buildings.Sandhu provided a list of the following transactions that management thought might be included in the cost of the land and building.

a. On January 2, Sandhu Manufacturing purchased the land on which the factory would be constructed along with an old run-down building that it planned to demolish. Sandhu paid $200,000 in cash and issued 1000 shares of its common stock in exchange for the property. The stock had a par value of $50 per share. Because the corporation was privately held, the stock was not actively traded but Sandhu estimated that the stock would likely sell for about $110 per share. An independent appraisal of the land and dilapidated building estimated the combined value was $300,000.

b. On January 15, Sandhu paid Robinson Demolition Co. $10,000 to demolish the building. Sandhu was able to sell the material salvaged from the building for $2,000.

c. On April 1, Sandhu paid its attorney, Paul Lehr, $10,000 for legal services provided in the first quarter of 2023. The following itemized billing was received:

1. Cost to organize the corporation including preparation and filing of articles of incorporation, bylaws, and other necessary documents. $5,000

2. Services associated with the land purchase 3,000

3. Services associated with obtaining building permits and other legal services related to construction of the building. 2,000

d. On May 1, Sandhu made the following three payments related to its factory facilities.

1. Fire insurance premium on the new building, $9,600. The premium paid for coverage for two years beginning on the date of payment.

2. Special tax assessment by the city for extending the street to the property, $4,500.

3. Payment of half the construction costs to Gastelum Construction Co., $450,000.

e. On September 30, the remaining $450,000 was paid to Gastelum Construction Co.

f. Aaron Sandhu, the CEO of Sandhu Manufacturing Co. received a salary of $36,000 during the first nine months of 2023, with the expectation of increasing his salary to $8,000 a month once production began.

g. Andres Sandhu, Aarons son, will be supervisor of one of the two production departments once operations begin. He received a $9,000 consulting fee for overseeing the new building construction during the first nine months of 2023.

h. Property values increased significantly during the first half of 2023. Aaron had the property reappraised on September 30 and found the value of the land had increased $100,000 over what was paid.

1). Land:

1. Purchase price of the land and old building:

The cost of the land is the cash paid plus the fair value of the stock issued. Since the stock is not actively traded, the best estimate of the stock's value is the appraised value of the land and building minus the cash paid. This statement is correct, Abdulla, but the amount you computed is not consistent with the previous sentence.

- Cash paid: $200,000

- Stock issued: 1,000 shares estimated at $110 per share = $110,000

Total cost: $310,000

(Even though the appraisal was $300,000, the actual cost paid is higher and would be used for accounting purposes.)

2. Demolition costs of the old building: This would be added to the land cost since it prepares the land for its intended use.

- Demolition: $10,000

- Less: Salvage proceeds: ($2,000)

- Net cost: $8,000 correct

3. Legal services associated with the land purchase: This cost is directly associated with the acquisition of the land.

- Legal services for land purchase: $3,000 correct

4. Special tax assessment for street extension: This would typically be capitalized to the land since it's a long-term improvement.

- Special tax assessment: $4,500 correct

Buildings:

1. Construction costs paid to Gastelum Construction Co.: This includes all costs directly related to the construction of the building.

- First payment: $450,000

- Second payment: $450,000

- Total construction costs: $900,000 correct

2. Legal services related to construction of the building: These costs would be capitalized as part of the building's cost.

- Legal services for building permits/construction: $2,000 correct

Non-Capitalized Costs:

- Fire insurance premium: This is a future expense and would be recorded as prepaid insurance, not as part of the building cost. The fire insurance is an overhead cost during construction. (The coverage includes the period of time that the building is under construction.) You need to calculate the insurance cost during the construction period and add it to the cost of the building.

- Salaries and consulting fees: These are operational expenses, not capital expenditures, and would not be added to the cost of land or buildings. correct

- Increase in land value due to appreciation: This is an unrealized gain and does not affect the historical cost of the land for accounting purposes. good!

Based on the above, the balances would be:

Land:

- Purchase price and stock value: $310,000

- Demolition net cost: $8,000

- Legal services for land purchase: $3,000

- Special tax assessment: $4,500

- Total Land Cost: $325,500

Buildings:

- Construction costs: $900,000

- Legal services for building permits/construction: $2,000

- Total Building Cost: $902,000

So, the correct balance on December 31, 2023, for the land account would be $325,500 and for the buildings account would be $902,000