Question

Oriole Landscaping began construction of a new plant on December 1, 2020. On this date, the company purchased a parcel of land for $142,800 in cash. In addition, it paid $2,880 in surveying costs and $4,320 for a title insurance policy. An old dwelling on the premises was demolished at a cost of $3,360, with $720 being received from the sale of materials. Architectural plans were also formalized on December 1, 2020, when the architect was paid $40,800. The necessary building permits costing $3,360 were obtained from the city and paid for on December 1 as well. The excavation work began during the first week in December with payments made to the contractor in 2021 as follows. Date of Payment Amount of Payment March 1 $264,000 May 1 334,800 July 1 63,600 The building was completed on July 1, 2021. To finance construction of this plant, Oriole borrowed $603,600 from the bank on December 1, 2020. Oriole had no other borrowings. The $603,600 was a 10-year loan bearing interest at 9%. Compute the balance in each of the following accounts at December 31, 2020, and December 31, 2021. (Round answers to 0 decimal places, e.g. 5,275.) December 31, 2020 December 31, 2021 (a) Balance in Land Account 152640 152640 (b) Balance in Building 44160 706560 (c) Balance in Interest Expense 4527 58851

Answer 1

	EXPLANATION IS GIVEN BELOW :
A)	Compute Balance of Land at December 31,2020 :
	Particulars	Amount($)
	Purchase price	$ 142,800
	Add: Survey cost	$ 2,880
	Add: Title insurance policy	$ 4,320
	Add: Demolition cost	$ 3,360
	less: Receipt from sale of materials	($720)
	Balance of Land at December 31,2020	$ 152,640
	Compute Balance of Land at December 31,2021 :
	Particulars	Amount($)
	Opening balance	$ 152,640
	Add: Additions	$ 0
	Add: Expenses	$ 0
	Balance of Land at December 31,2021	$ 152,640

B)	Compute Balance of Building at December 31,2020 :
	Particulars	Amount($)
	Architectural expenses	$ 40,800
	Add: permit charges	$ 3,360
	Add: interest to be capitalized (Note 1 )	$ 1,476
	Balance of Building at December 31,2020	$ 45,636

	Compute Balance of Building at December 31,2021 :
	Particulars	Amount($)
	Opening balance	$ 55,968
	Add: Payment through installments
	Mar-01	$ 264,000
	May-01	$ 334,800
	Jul-01	$ 63,600
	Add: interest to be capitalized (Note 2 )	$ 22,329
	Balance of Building at December 31,2021	$ 740,697

c)	Compute Balance in interest expense at December 31,2020 :
	Interest expenses = Total interest - interest to be capitalized for 2020
	Interest expenses = $ 4,527 (see note 3) - $ 1,476 ( see note 1)

	Compute Balance in interest expense at December 31,2021 :
	Interest expenses = Total interest - interest to be capitalized for 2021
	Interest expenses = $ 54,324 (see note 4) - $ 22,329( see note 2)
	Interest expenses for 2021 = $ 31,995

Notes :

Note 1:

Calculate the interest to be capitalized :

Interest to be capitalized = {( land as on 2020 + Architecture expense + permit charges )* interest rate * 1/12}

Interest to be capitalized = {( $ 152,640 + $ 40,800 + $ 3,360 )* 9 % * 1/12}

Interest to be capitalized = $ 1,476

Note 2 :

Calculate the interest to be capitalized :

Interest to be capitalized = Accumulated interest * interest rate

To calculate the Accumulated interest :

Accumulated interest = { (land as on 2020 + Buildings as on 2020 )* 6/12 }+ { payment 1 * 4/12 } +{ payment 2 * 2/12 }+ { payment 3 *0/12 }

Accumulated interest = { ($ 152,640+ $ $ 55,968 )* 6/12 }+ { $ 264,000 * 4/12 } +{ $ 334,800 * 2/12 }+ { $ 63,600 *0/12 }

Accumulated interest = $ 104,304 +$ 88,000 +$ 55,800 +$ 0

Accumulated interest = $ 248,104

Note 3:
Calculate the total interest for 2020 :
Total interest for 2020 = $ 603,600 * 9% *1/12
Total interest for 2020 = $ 4,527
(From December 1,2020 to December 31, 2020 )

Note 4:

Calculate the total interest for 2021 :

Total interest for 2021 = $ 603,600 * 9% *12/12

Total interest for 2021 = $ 54,324

( Interest to be calculated entire year i.e 12 months )