How to Account for Land Improvements?
Land improvement is the additional spending which the company paid to increase the land’s usability. As we already know that land’s useful life is unlimited, however, the land improvement may last only a certain accounting period which represents its useful life.
The land improvement may have its own useful life, so it should be capitalized as a separate asset and calculated the depreciation base on the life span. The cost will be recorded in the balance sheet and depreciate every month to the income statement.
However, the costs of land improvement may be related to the acquisition of land and make it ready for use. The company needs to prepare land for its intended use, thus all the cost should be capitalized on land which will never depreciate.
Land Improvement Example
Land improvement includes the following items:
- Fence
- Driveway
- Lighting
- Landscaping
- Parking lot
Land Improvements as Part of Land
Any expense related to land should be capitalized into land cost in the balance sheet. They are the costs that bring the asset to be ready for use, so they meet the definition to be capitalized as part of the asset.
For example, after purchasing the land, company A spends $ 10,000 to remove the existing building and $ 20,000 to level the land. Without removing the building and leveling the land, we will not be able to use it. These are the cost of land improvements that should be capitalized on land.
Journal Entry
| Account | Debit | Credit |
|---|---|---|
| Land | 30,000 | |
| Cash | 30,000 |
Land Improvements as a Separate Asset
Any expense related to the land improvement produces a physical asset and they will last for a specific time period. These costs should be capitalized as a separated fixed asset in the balance sheet. And it will be depreciated over the useful life.
For example, After purchasing land, Company A spends 10,00 to build the fence which expects to last for 10 years. After that, they spend another 15,000 to build a parking lot for which will last for 5 years.
The fence and the parking lot is the separated asset with specific useful life. They will decrease the usability over time, so they should be depreciated. We cannot in them into the cost of land as the land will never be depreciated.
| Account | Debit | Credit |
|---|---|---|
| Land Improvement | 25,000 | |
| Cash | 25,000 |
