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Chapter 6: Account Classification Descriptions

Accumulated Depreciation-Land Improvements

So, when depreciation has decreased the cost basis, it opens the investor up to having to pay capital gains tax upon the sale of the property. Investors need to monitor their financial statements and understand what their tax liability will be if they choose to sell a property that has been depreciated. Depreciation is an expense that is meant to help asset owners account for wear and tear to the asset through the normal course of use. Property, plant, and equipment, including real estate can all be depreciated because the thinking goes that they get “used up” over time. For example, a rental property that is lived in for many years will surely end up with some dents and dings, even if the property management company does a good job maintaining it. There are two ways that depreciation is typically calculated in commercial real estate.

Accumulated Depreciation-Land Improvements

Goodwill C. Land D. All of the above are intangible assets. Learn the definition of fixed assets and examine their importance.

Amendments under consideration by the IASB

This account reflects the acquisition value of land owned by the State. Purchased land is recorded at purchase price plus costs such as legal, recording fees, and land improvements consisting of betterments, other than buildings, that ready land for its intended use and produce permanent benefits. Examples of land improvements include site improvements such as excavation, fill, grading, and utility installation; removal, relocation, or reconstruction of property of others, such as railroads and telephone and power lines; retaining walls. Donated land or land which is obtained by means other than purchase, is recorded at fair-market value based on appraisal at time of acquisition. Land and land improvements are inexhaustible capital assets that should not be depreciated. A liability account used to record a debt owed by one fund to another fund in the same governmental unit. It is recommended that separate accounts be maintained for each interfund loan.

Why do companies depreciate land improvements but not land?

Unlike the land, a land improvement has a limited useful life and therefore the cost of the improvement is depreciated over the useful life of the improvement.

This account is used to record costs of acquiring or constructing a building to be used by the Bank. The cost of a building should include all expenditures related directly to its acquisition or construction. Generally, all costs incurred, beginning with excavation through completion of construction, are considered part of the building costs. The cost of the building should not include the cost of land, land improvements, or fixed machinery and equipment. The fair value of the asset is the amount at which the asset could be bought or sold in a current arms-length transaction. The ideal method for determining fair value is to use the price for the asset if it is traded in an active market.

Accumulated Depreciation vs. Depreciation Expense

For Comprehensive Annual Financial Report reporting this account will roll with buildings. The PP&E account is often denoted as net of accumulated depreciation. Accumulated Depreciation-Land Improvements This means that if a company does not purchase additional new equipment , then Net PP&E should slowly decrease in value every year due to depreciation.

For investors who are looking to sell one or more properties, accumulated depreciation can become a major factor that needs to be addressed with an accountant or tax attorney prior to completing the sale. The reason for this is that accumulated depreciation reduces the cost basis of the property, which can result in a gain upon the sale of the property. That said, there is a potential downside to depreciation, and that comes when the investor sells a property that has been depreciated for a number of years. As the years go by and depreciation is allocated to a property, the amount of accumulated depreciation will increase as well. As the accumulated depreciation increases, the net book value of the property declines.

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