A company purchases a parcel of land for $500,000 to serve as the site for a new retail store. It also pays $60,000 to install a paved parking lot, $15,000 for a perimeter fence, and $8,000 for landscaping with defined-life plantings, each expected to need replacement or major resurfacing within 15-20 years. Under US GAAP, how should the company account for these costs?
- Capitalize all $583,000 to the Land account, since land and everything attached to it while it is being prepared for its intended use are treated as one indivisible depreciable asset
- Capitalize the $500,000 land cost to Land, and expense the $83,000 of paving, fencing, and landscaping costs immediately, because these do not add value beyond the land's existing indefinite utility
- Capitalize the $500,000 land cost to Land, which is never depreciated because it has an indefinite life, and capitalize the $83,000 of paving, fencing, and landscaping costs to a separate Land Improvements account, depreciated over each improvement's own limited estimated useful life
- Capitalize the $500,000 land cost to Land and depreciate it over the same useful life as the retail store built on it, since land used for a specific business purpose loses its indefinite-life character
Why C? And why not the others?
Correct answer: C. Capitalize the $500,000 land cost to Land, which is never depreciated because it has an indefinite life, and capitalize the $83,000 of paving, fencing, and landscaping costs to a separate Land Improvements account, depreciated over each improvement's own limited estimated useful life
Land is presumed to have an indefinite useful life and is therefore never depreciated under US GAAP, so its $500,000 cost stays in the Land account permanently. Site additions attached to the land that have their own limited useful lives — such as paving, fencing, and plantings that will need resurfacing or replacement within a couple of decades — are recorded separately in a Land Improvements account and depreciated over each improvement's own estimated life, because they do not share land's indefinite-life characteristic. Treating the entire $583,000 as one indivisible depreciable asset ignores that land itself has no determinable useful life to depreciate over, while the improvements clearly do. Expensing the $83,000 of improvement costs immediately is wrong because these expenditures provide multi-period benefit and meet the capitalization criteria for a long-lived asset; there is no basis for treating durable site improvements as a current-period cost merely because they sit on indefinite-lived land. Depreciating the land itself over the building's useful life confuses the building (a depreciable asset) with the land beneath it, which retains its indefinite life regardless of what is built on it or how the site is used.
Source: FASB ASC 360-10-35 (depreciation of property, plant, and equipment) and general US GAAP practice guidance distinguishing land (indefinite life, not depreciated) from land improvements (limited life, depreciated separately)