Analysis of Falcon Waste Management Acquisition
What are the amounts Falcon Waste Management should capitalize as the cost of the land and the building?
1.) In the first scenario (warehouse demolished), Falcon should capitalize $720,000 as the cost of the land and $30,000 as the cost of the building. 2.) In the second scenario (warehouse used), Falcon should capitalize $855,000 as the cost of the land and $472,000 as the cost of the building.
Answer:
1.) In the first scenario, where the warehouse is immediately demolished, the cost of the land and the building for Falcon Waste Management would be determined as follows:
Land:
Purchase price: $720,000
Building:
Purchase price of warehouse: $0 (since it was demolished)
Total demolition cost: $30,000
Therefore, in this scenario, Falcon should capitalize $720,000 as the cost of the land and $30,000 as the cost of the building (demolition cost).
2.) In the second scenario, where Falcon decides to use the warehouse, the cost of the land and the building would be determined based on the fair values and additional acquisition expenditures:
Land:
Purchase price: $780,000
Broker's commission: $48,000
Title insurance: $12,000
Miscellaneous closing costs: $15,000
Total land cost: $780,000 + $48,000 + $12,000 + $15,000 = $855,000
Building:
Purchase price of warehouse: $780,000
Fair value of warehouse: $308,000
Total building cost: $780,000 - $308,000 = $472,000
Therefore, in this scenario, Falcon should capitalize $855,000 as the cost of the land and $472,000 as the cost of the building.
When Falcon Waste Management purchased the land and the warehouse, the decision on whether to demolish the warehouse or use it had a significant impact on the capitalization of costs. In the first scenario, where the warehouse was demolished, only the cost of the land and the demolition cost of the building were capitalized. However, in the second scenario where the warehouse was used, additional expenditures related to the acquisition were considered along with the fair values of the land and the warehouse.
It is crucial for Falcon Waste Management to accurately determine the capitalized costs as they will impact the financial statements and asset valuation of the company. By carefully evaluating the options and costs associated with the acquisition, Falcon can make informed decisions on how to capitalize the land and building appropriately.
Overall, the analysis showcases the importance of thorough cost evaluation and decision-making in asset acquisitions for companies like Falcon Waste Management.