Question

Early in 2019, Desert, Co. finalized plans to expand operations. The first stage was completed on January 19th with the purchase of a tract of land to be used as the location for their new office complex. The land and existing building were purchased for $800,000, paying cash. Title search, title insurance, back property taxes and other closing costs totaling $20,000 were paid at closing. During February, the old building was demolished at a cost of $70,000, and an additional $50,000 was paid to clear and grade the land. Salvaged materials from the demolished building were sold for proceeds of $20,000. Construction of the new office complex began on March 1 and was completed on November 30, 2019. Construction expenditures paid to sub-contractors were made as follows: March 1 June 1 Sept 1 Nov 1 $ 900,000 $1,200,000 $1,500,000 $1,800,000 Desert borrowed a $2,000,000, 8%, 2-year note on February 1st to help finance construction. Interest will be paid annually. The company's only other outstanding debt during all of 2019 was a $3,100,000, 9%, 10-year note payable. In December, the company purchased equipment and furniture for a lump-sum price of $550,000. The fair values of the equipment and furniture were $455,000 and $245,000, respectively. Given this information, determine the Original Cost of the Land.

Answer 1

In the given question, the capitalisation period will be from 01/03/2019 to 30/11/2019 when the construction was completed. Question 1 Purchase cost Add:Property taxes & insurance Question 2 8,00,000 Historical cost 20,000 Add:Interest capitalised 9,20,000 1,20,000 Weighted average Date Total payments Capitalisation period accumulated expenditure 10,40,000 Dismantling costs Clearing & grading costs Less:Proceeds from sale of salvaged materials 70,000 Total 50,000 -20,000 01-03-2019 01-06-2019 01-09-2019 01-11-2019 9,00,000 12,00,000 15,00,000 18,00,000 6,75,000 6,00,000 3,75,000 1,50,000 18,00,000 Original cost of land 9,20,000 Question 3 Interest expense to be reported in the income statement (425667-120000) Question 4 In case of non-specific borrowing of $4,50,000, 3,05,667 avoidable interest will remain the same i.e.$1,20,000 1,46,667 2 Interest on specific borrowings 3 On $20,00,000 @ 8% for 11 months 4 Interest on general borrowings 5 On $31,00,000 @ 9% for 12 months 6 Total actual interest 2,79,000 4,25,667 Question 5 Lumpsum price 5,50,000 Fair value of equipment 4,55,000 Fair value of furniture 2,45,000 Total fair value of both equipment & furniture 7,00,000 Allocation of the lumpsum price should be in the ratio of fair values Equipment 3,57,500 Furniture 1,92,500 8 Avoidable interest (20,00,000*8%*9/12) 1,20,000 9 Capitalised interest = Lower of actual interest and avoidable interest $1,20,000 1 5,50,000