Question

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 $960,000. San Antonio paid $280,000 and signed a noninterest-bearing note requiring the company to pay the remaining $680,000 on March 28, 2020, An interest rate of 10% properly reflects the time value of money for this type of loan agreement. Title search, insurance, and other closing costs totaling $28,000 were paid at closing During April, the old building was demolished at a cost of $78,000, and an additional $58,000 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 $2,400,000 1,900,000 1,380,000 2,280,000 San Antonio borrowed $4,200,000 at 10% on May 1 to help finance construction. This loan, plus interest, will be paid in 2019.The company also had the following debt outstanding throughout 2018: $2,800,000, $4,800,000, 10% long-term note payable 7% long-term bonds payable In November, the company purchased 10 identical pieces of equipment and office furniture and fixtures for a lump-sum price of $680,000. The fair values of the equipment and the furniture and fixtures were $585,000 and $195,000, respectively. In December, San Antonio paid a contractor $325,000 for the construction of parking lots and for landscaping.

Answer 1

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Requirement 1
Land
Purchase price (determined below)	$                                                                 841,986
Closing costs	$                                                                   28,000
Removal of old building	$                                                                   78,000
Clearing and grading	$                                                                   58,000
	$                                                              1,005,986
Purchase price of land:
Cash paid	$                                                                 280,000
Value of note (From below working)	$                                                                 561,986
	$                                                                 841,986
† Present value of note payment:
PV = $680,000 (.82645)	$                                                                 561,986
Present value of $1: n = 2, i = 8% (from Table 2)
Land improvements
Parking lot and landscaping	$                                                                 325,000
Building
Construction expenditures:
5-1	$                                                              2,400,000
7-1	$                                                              1,900,000
9-1	$                                                              1,380,000
10-1	$                                                              2,280,000
Total expenditures	$                                                              7,960,000
Interest capitalized (determined below)	$                                                                 209,500
Total cost of building	$                                                              8,169,500
Average accumulated expenditures:
May 31, 2018	$2,400,000 x   6/6 =	$                 2,400,000
July 30, 2018	1,900,000 x   3/6 =	$                    950,000
September 1, 2018	1,380,000 x   2/6 =	$                    460,000
October 1, 2018	2,280,000 x   1/6 =	$                    380,000
		$                 4,190,000
Interest capitalized:
$4,190,000 x10% x 6/12 =	$                                                                 209,500
Equipment and furniture and fixtures
			Initial
		Percent of Total	Valuation
	Fair Value	Fair Value	% x $680,000
Equipment	$                                                                 585,000	0.75	$           510,000
Furniture & fixtures	$                                                                 195,000	0.25	$           170,000
Totals	$                                                                 780,000	1.00	$           680,000
Initial valuation:
Equipment	$                                                                 510,000
Furniture & fixtures	$                                                                 170,000
Requirement 2
Interest expense:
Note issued to purchase land and building,
$561,986 x 10% x 9/12 =	$                                                                   42,149
Construction loan, $4,200,000 x 10% x 8/12	$                                                                 280,000
Long-term note, $2,800,000 x 10%	$                                                                 280,000
Long-term bonds, $4,800,000 x 7%	$                                                                 336,000
Total	$                                                                 938,149
Less: Interest capitalized (determined above)	$                                                                -209,500
Interest expense	$                                                                 728,649