Question

Problem 10-12 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, 2018 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 for $920,000. San Antonio paid $260,000 and signed a noninterest bearing rate requiring the company to pay the remaining $660.000 on March 28 2020. An interest rate of 65 procerly reflects the time value of money for this type of loan agreement. Tibe search Insurance, and other closing costs totaling $26.000 were paid a closing During April, the old building was demolished at cost of 576 000 and an additional $56.000 was paid to clear and grade the land Construction of a new bulding began on May 1 and was completed on October 29 Construction expenditures were as follows of S1.EVO 51. EVA51. EVALE SLEVADOS and PVA ESB Use appropriate factors from the tables provided) 0,00 October 1 2 ,150.000 San Antonio borrowed 58.900.000 at 6% on May 1 to help finance com company also had the following debt outstanding throughout 2018 Interest, will be paid in 2019 The $2,600,00, 54, Long terme peole 5 og ter bonde able In November, the company purchased 10 identical pieces of equipment and office furniture and fixtures for a lump sum price of 5660,000. The fair values of the equipment and the furniture and fixtures were $494000 and $265, 000, respectively in December San Antonio paid a contractor $315,000 for the construction of parking lots and for landscaping Required 1. Determine the initial values of the various assets that San Antonio acquared or constructed during 2018 The company yes the specific interest method to determine the amount of interest cat ed on the building construction 2. How much interest expense wil San Antonio reportinis 2015 income statement ors in the w Required a agured 2 Determine the initial values of the various so that San Antal the specific interest method to determine the amount of interest cap or to the Parent whole or 2018. The company w

Answer 1

Part 1

Land	$1005400
Land improvements	$315000
Building	$7433400
Equipment	$429000
Furniture and fixtures	$231000

Purchase price of land:

Cash paid = 260000

Value of note = 587400 (660000*0.89000 (PVIF6%,2yr))

Purchase price of land = $847400

Land

Purchase price = 847400

Closing costs = 26000

Removal of old building = 76000

Clearing and grading = 56000

Total cost of land = 1005400

Land improvements

Parking lot and landscaping = 315000

Building

Construction expenditures:

May 1 - 2100000

june 30 - 1800000

september 1 - 1260000

october 1 - 2160000

Total expenditures – 7320000

Interest capitalized - 113400

Total cost of building =7433400

Accumulated expenditures:

May 1 – 2100000 * 6/6 = 2100000

june 30 – 1800000*3/6 = 900000

september 1 – 1260000*2/6 = 420000

october 1 – 2160000*1/6 = 360000

Interest capitalized = 3780000*6%*6/12 = 113400

Equipment and furniture and fixture

	Fair value	% of total fair value	Initial valuation (760000)
Equipment	494000	65% (494000/760000)	429000	(660000*65%)
Furniture and fixtures	266000	35% (266000/760000)	231000	(660000*35%)
total	760000	100%	660000

Initial valuation:

Equipment = 429000

Furniture and fixtures = 231000

Part 2

Interest expense

$507033

Interest expense:

Note issued to purchase land and buildings (587400*6%*9/12) = 26433

Construction loan (3900000*6%*8/12) = 156000

Long –term note (2600000*8%) = 208000

Long-term bonds (4600000*5%) = 230000

Total =620433

Less: interest capitalized = 113400

Interest expense = $507033