Question

Problem 10-12 (Algo) Acquisition costs; lump-sum acquisition; noninterest-bearing note; Interest capitalization (LO10-1, 10-2, 10-3, 10-7] Early in its fiscal year ending December 31, 2021, San Antonio Outfitters finalized plans to expand operations. The first stage was completed on March 28 with the purchase of a tract of land on the outskirts of the city. The land and existing building were purchased by paying $310.000 immediately and signing a noninterest-bearing note requiring the company to pay $710.000 on March 28, 2023. An interest rate of 6% properly reflects the time value of money for this type of loan agreement. Title search, insurance, and other closing costs totaling $31.000 were paid at closing. At the end of April, the old building was demolished at a cost of $81.000, and an additional $61,000 was paid to clear and grade the land. Construction of a new building began on May 1 and was completed on October 29. Construction expenditures were as follows: (FV of $1. PV of $1, FVA of $1. PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) May 1 July 30 September 1 October 1 $2,850,000 2,050,000 1 ,560,000 2,460,000 San Antonio borrowed $5,000,000 at 6% on May 1 to help finance construction. This loan, plus interest, will be paid in 2022. The company also had a $6,350.000. 9% long-term note payable outstanding throughout 2021. In November, the company purchased 10 identical pieces of equipment and office furniture and fixtures for a lump-sum price of values of the equipment and the furniture and fixtures were $567.000 and $243.000, respectively. In December, San Antonio paid a contractor $340,000 for the construction of parking lots and for landscaping. Required: 1. Determine the initial values of the various assets that San Antonio acquired or constructed during 2021. The company uses the specific interest method to determine the amount of interest capitalized on the building construction. 2. How much interest expense will San Antonio report in its 2021 income statement? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the initial values of the various assets that San Antonio acquired or constructed during 2021. The company uses the specific interest method to determine the amount of interest capitalized on the building construction. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar.) Assets Initial Value Land Land improvements Building Equipment Furniture & fixtures < Required 1 Required 2 >

Answer 1

1

Particulars	Land	Land Improvements	Building	Equipment	Furniture
Purchase of Land and Building	310,000	-	-	-	-
Title, Insurance	31,000	-	-	-	-
Demolition charges of Building	-	81,000	-	-	-
Clearing and grading charges	-	61,000	-	-	-
Construction of building	-	-	2,850,000	-	-
Construction of building	-	-	2,050,000	-	-
Construction of building	-	-	1,560,000	-	-
Construction of building	-	-	2,460,000	-	-
Capitalisation of Interest (Refer working note below)	-	-	154,281	-	-
Parking Lots and Landscaping	-	-	340,000	-	-
Equipment purchased (710,000*567,000/810,000)	-	-	-	497,000	-
Furniture purchased (710,000*243,000/810,000)	-	-	-	-	213,000
Initial value of assets to be capitalised	341,000	142,000	9,414,281	497,000	213,000

Capitalisation of Interest
		29-Oct
Date	Payment	No of days till 29.10.2021	Interest ($) till 29.10.2021	6% Specific loan utilised	6% Specific loan left	9% General Debt utilised	9% General Debt left
1-May	2,850,000	181	84,797	2,850,000	2,150,000	-	-
30-Jul	2,050,000	91	30,666	2,050,000	100,000	-	-
1-Sep	1,560,000	58	21,833	100,000	-	1,460,000	4,890,000
1-Oct	2,460,000	28	16,984	-	-	2,460,000	2,430,000
			154,281	5,000,000		3,920,000

2

Interest Expense to be reported

Date of acquisition	Name of Loan	Principal	Interest rate	No of days	Interest amount	Capitalised amount	Interest to be expensed off
28-Mar	6% Note payable after 2 years	631,897	6%	278	28,877	-	28,877
1-May	6% Loan	5,000,000	6%	244	200,548	116,416	84,132
Full 2021	9% Long term loan note	6,350,000	9%	365	571,500	37,864	533,636
					800,925	154,281	646,644