Question

Problem 10-6 Larkspur Landscaping began construction of a new plant on December 1, 2017. On this date, the company purchased a parcel of land for $140,400 in cash. In addition, it paid $2,640 in surveying costs and $3,840 for a title insurance policy. An old dwelling on the premises was demolished at a cost of $3,120, with $1,200 being received from the sale of materials. Architectural plans were also formalized on December 1, 2017, when the architect was paid $34,800. The necessary building permits costing $3,120 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 2018 as follows Date of Payment March 1 May 1 July 1 Amount of Payment $252,000 332,400 64,800 The building was completed on July 1, 2018. To finance construction of this plant, Larkspur borrowed $609,600 from the bank on December 1, 2017, Larkspur had no other borrowings. The $609,600 was a 10-year loan bearing interest at 9% Compute the balance in each of the following accounts at December 31, 2017, and December 31, 2018. (Round answers to O decimal places,e.g.5,275.) December 31, 2017 December 31, 2018 (a) Balance in Land Account (b) Balance in Building (c) Balance in Interest Expense

Answer 1

Answer: Dec 31, 2017 Dec 31, 2018 $148,800 $148,800 $42,492$719,124 $27,432 (a) (b) (c) Balance in Land Account Balance in Building Balance in Interest Expense $0 Workings: Amounts spent for acquiring a machine along with those costs incurred till the time the land is ready for use shall be capitalized. These costs include land's purchase price, surveying costs, title insurance policy and old dwelling demolishing cost (if any) but should be reduced by cash received from the sale of materials (if any). That is $140,400 [Paid by cash] Land's purchase cost Surveying cost Title insurance policy Old dwelling demolishing cost Less: Cash received from the sale of materials Cost of land to be capitalized as at Dec. 31, 2017 $2,640 [Paid by cash] $3,840 [Paid by cash] $3,120 [Paid by cash] $1,200 $148,800 NOTE: No further costs were incurred for land and so $148,800 shall be continued as balance in land as at Dec. 31, 2018

Subsequent costs incurred for building plant on the land purchased shall be capitalized as cost of building including interest on borrowed capital till the time the plant is constructed fully. That is $34,800 $3,120 Architect fees Building permit fees Interest paid on borrowed fund from Dec. 1 till Dec. 31, 2017 Cost of building to be capitalized as at Dec. 31, 2017 Add: Excavation cost dated March 1, 2018 Excavation cost dated May 1, 2018 Excavation cost dated July 1, 2018 Interest paid on borrowed fund till Jul. 1, 2018 Cost of building to be capitalized as at Dec. 31, 2018 $4,572 [S609,600 x 9% x (1/12)] 42,492 $252,000 $332,400 $64,800 $27,432 [$609,600 x 9% x (6/12) from Jan. 1 thru Jun. 30, 2018)] $719,124 As the interest expense incurred after completion of plant was the cost incurred after the plant equipment was ready for use it is not qualified to be capitalized. In other words, it is just an ordinary or routine period expense incurred during normal course of business. As a result, interest expense paid on the borrowed amount from Jul. 1 thru Dec. 31, 2018 shall be charged to income statement as interest expense. That is Amount borrowed Annual interest rate # of months lying between July 1 thru Dec. 31, 2018 Interest expense to be reported as at Dec. 31, 2018 $609,600 9% $27,432 [$609,600 x 996 x (6/12)]