Question

During February, the old building was demolished at a cost of $240,000, and an additional $200,000 was paid to clear and grade the land. Construction of a new building began on March 1 and was completed on October 30. Construction expenditures were as follows:

                     March 31 $1,600,000

                     June 30 2,400,000

                     July 31 2,400,000

                     September 1 1,200,000

HDR Company did not borrow specifically for the construction project, but did have the following debt outstanding throughout 2019:

                     $12,000,000, 8% long-term note payable

                     $4,000,000, 5% long-term note payable

In December 2019, the company purchased equipment and office furniture and fixtures for a lump-sum price of $1,600,000. The fair values of the equipment and the furniture and fixtures were $1,080,000 and $720,000, respectively. In December 2019, HDR paid $680,000 for the construction of parking lots and landscaping.

Required:

1. Determine the initial values of the various assets that HDR acquired or constructed during 2019. (Hint: the assets mentioned are listed below: )

a. Land

b. Land Improvements

c. Equipment

d. Furniture and Fixtures

2. How much interest expense will HDR report in its 2019 income statement?

Answer 1

In the question land purchase cost is not given however preparing a plot of land to be used for a purpose is also considered as land asset cost, in our case the cost of demolition of $240,000 and additional cost of $200,000 to clear and grade the land will be taken in cost of land asset as without doing this we would not be able to use the land for our intended purpose.

So the initial Cost of Land = $ 440,000 (240,000+200,000)

Land Improvement means any enhancements to a plot of land that makes the land more usable, in our case land without the building is of no use of the cost of building the new building will be accounted in land improvement cost. Also the parking lots and landscaping will be included in this as they are adding value to land and building which is constructed on it.

So the initial land improvement cost for 2019 is $ 8,280,000 (1600000+2400000+2400000+1200000+680000)

Equipment and Furniture and fixtures are valued at 1080000 and 720000 respectively however HDR paid 1600000 which is 200000 less means they have received a discount of 11.11% while recording it in our books we will record it at the cost which we paid so the cost of each will be fair value less discount

So Cost of Equipments is = $ 960,012 (1080000*(1-0.1111))

And Cost of Furniture and Fixtures is = $ 639,988 (1600000-960012)

1. Initial value of various assets are:

1. Land = $ 440,000
2. Land Improvement = $ 8,280,000
3. Equipment = $ 960,012
4. Furniture and Fixtures = $ 639,988

2. Interest expenses can be calculated as

For 8% long term notes it is $ 960,000 (12,000,000*8%)

For 5% long term notes it is $ 200,000 (4,000,000*5%)

Total Interest expenses reported will be $ 1,160,000 (960000+200000)