Question

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On January 3, 2019, HDR Company acquired a tract of land just outside the city limits. The land and existing building were purchased for $4.8 million. HDR Company paid $800,000 and signed a noninterest-bearing note requiring the company to pay the remaining $4,000,000 on December 31, 2020. An interest rate of 7% properly reflects the time value of money for this type of loan agreement. Transfer taxes, title insurance, and other costs totaling $48,000 were paid at closing.

     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: )
   1. Land
   2. Land Improvements
   3. Equipment
   4. Furniture and Fixtures
2. How much interest expense will HDR report in its 2019 income statement?

Answer 1

HDR Company Perticulars Amount Land Purchased Transfer taxes, title insurance, and other costs Demolision Charges Clear Grade of land charges Parking Lots And Landscaping 48,00,000 48,000 2,40,000 2,00,000 6,80,000 Total Land and land improvement cost 59,68,000 Building Construction Expenditure Amount Paid In March 31, 2019 Paid In Jun 30, 2019 Paid In July 31, 2019 Paid In September 1, 2019 16,00,000 24,00,000 24,00,000 12,00,000 Total Building Cost 76,00,000 Land Cost Includes Land Purchase Cost Transfer taxes, title insurance, and other costs 4800000 48000 Total Land cost 4848000 Land Improvement Cost Demolision Charges of old building Clear Grade of land charges Parking Lots And Landscaping 2,40,000 2,00,000 6,80,000 Total Land Improvement Cost 11,20,000 Paid Lum-sum amount for purchase of equipment and furniture and fixture Amount $1600000 Ratio Equipment 1080000 Furniture And Fixture 720000 60% 40% 1800000 Equipment Cost = 1600000 * 60% Furniture Cost = 1600000 * 40% 960000 640000 Solution Land 48,48,000 11,20,000 9,60,000 6,40,000 Land Imrovement Cost Equipment Furniture And Fixture 3)

Interest calculation Paid In March 31, 2019 Paid In Jun 30, 2019 Paid In July 31, 2019 Paid In September 1, 2019 16,00,000 24,00,000 24,00,000 12,00,000 Rate Of Interest Interest For No of Months Amount 7% 9 84,000 7% 6 84,000 70,000 28,000 Interest Payable 2,66,000 8% Long-term Note Payable Long-term Note Payable 1,20,00,000 40,00,000 12 12 9,60,000 2,00,000 5% Interest Payable 11,60,000 Interest Expenses will HDR reports in 2019 Income Statement $14,26,000