Capital or expense; land, improvements, building; the lump-sum split

The test: in place and ready for use

An asset's cost is every outlay necessary to get it to the location and into the condition for its intended use — the invoice, and also the freight, the installation, the testing, the legal fees on a property. Anything that does not get the asset ready — a maintenance plan for the years ahead, a tax that will be refunded, a repair after it is already working — is not cost. The first group is capitalised (debited to the asset and amortised over its life); the second is expensed in the period, or is not an expense at all.

Worked example — Northlake's snowmaking pump

The pump's supplier invoice has six lines:

$$\text{Cost}=38,000+1,200+2,300+500=42,000$$

Equipment                                42,000
    Cash                                          42,000
Snowmaking pump: invoice, freight, installation, test run.

The HST goes to a receivable from the CRA (it comes back on the next return) and the maintenance plan to Prepaid Maintenance, an asset used up over three years. Neither is amortised as part of the pump.

A repair is an expense, whatever its size

In February the groomer's hydraulic line splits and the repair costs $850. The groomer is already in place and working; the repair keeps it that way, it does not make it more than it was. That is a revenue expenditure — Dr Repairs Expense 850 / Cr Accounts Payable 850 — and it would still be an expense at $9,000, because the test is what the outlay does, not how big it is. An outlay that extends the life or increases the capacity (a new engine that adds five years) is a capital expenditure, added to the asset; Module 11 returns to that line.

Land, land improvements, building — three accounts

Land is never amortised: it does not wear out. So a property purchase is split three ways, because two of the three parts do wear out. Land takes the ground itself plus the costs of acquiring it (legal fees, survey, clearing and grading, even demolishing an old structure to make the site usable). Land Improvements takes things built on the land that wear out — a parking lot, fencing, outdoor lighting, a paved trailhead. Building takes the structure.

The lump-sum split

Northlake buys a neighbouring property — land, a lodge annex and a gravel parking area — for 480,000 cash, one price. An appraisal values the parts at land 250,000, building 325,000, improvements 25,000: 600,000 in total, more than was paid. Each part gets the same share of the price as it has of the appraisal:

$$\text{Allocated cost}=\text{Price paid}\times \frac{\text{Appraised value of the part}}{\text{Total appraised value}}$$

The ratio is $480,000÷600,000=0.8$ — every part is recorded at 80 % of its appraisal, and the three costs add back to what was paid. Recording the appraised values themselves would put 600,000 of assets on the books for 480,000 of cash, and the entry would not balance; the seller's own carrying amounts are irrelevant, because Northlake's cost is what Northlake gave up.