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 $1,100,000. San Antonio paid $350,000 and signed a noninterest-bearing note requiring the company to pay the remaining $750,000 on March 28, 2020. An interest rate of 8% properly reflects the time value of money for this type of loan agreement. Title search, insurance, and other closing costs totaling $35,000 were paid at closing.

During April, the old building was demolished at a cost of $85,000, and an additional $65,000 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 $ 3,450,000 July 30 2,250,000

September 1 1,800,000

October 1 2,700,000

San Antonio borrowed $5,700,000 at 8% 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:

$3,500,000, 9% long-term note payable

$5,500,000, 6% 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 $750,000. The fair values of the equipment and the furniture and fixtures were $595,000 and $255,000, respectively. In December, San Antonio paid a contractor $360,000 for the construction of parking lots and for landscaping.

Required: Determine the initial values of the various assets that San Antonio acquired or constructed during 2018. The company uses the specific interest method to determine the amount of interest capitalized on the building construction.  How much interest expense will San Antonio report in its 2018 income statement?

Answer 1

	San Antonio
	The Land and existing building purchased on March 28th	$          11,00,000.00
	Amount Paid	$             3,50,000.00
	Balance amount paid by issuing non interest bearing Note	$             7,50,000.00
	Title search,Insurance & other cost paid	$                35,000.00
	On April old building demolished at a cost of	$                85,000.00
	Additional amount paid to clear and grade the land	$                65,000.00
	New construction was started on 1st May and completed on October 29th
	Construction Expenditures :
	May30th	$          34,50,000.00
	July 30th	$          22,50,000.00
	September 1st	$          18,00,000.00
	October 1st	$          27,00,000.00
	Amount borrowed on May 1st, at 8% interest to help finance construction	$          57,00,000.00
	Loan plus interest paid in 2018
	Debt Outstanding throughout 2011
	Long Term 9% Note Payable	$          35,00,000.00
	Long Term 6% Note Payable	$          55,00,000.00
	In November purchased 10 identical piece of equipment and furniture & fixtures	$             7,50,000.00
	Fair Value of Equipment	$             5,95,000.00
	Fair Value of furniture & fixture	$             2,55,000.00
	In December paid to contractor for construction of parking lot	$             3,60,000.00
	P.V of 8% for 2 years	0.85734
Ans)	Purchased Price of Land
	Amount Paid in Cash	$             3,50,000.00
	P.V of Note Payable($600000*.85734)	$             6,43,005.00
	Total Purchase Price	$             9,93,005.00
	Land Cost
	Purchase Price	$             9,93,005.00
	Title search,Insurance & other cost paid	$                35,000.00
	Removal of old building	$                85,000.00
	Clearing & Grading	$                65,000.00
	Total Cost of Land	$          11,78,005.00
	Land Improvement
	Amount paid to contractor Parking lot	$             3,60,000.00
	Building
	Construction Expenditures:
	May 30th	$          34,50,000.00
	July 30th	$          22,50,000.00
	September 1st	$          18,00,000.00
	October 1st	$          27,00,000.00
	Total Expenditure	$       1,02,00,000.00
	Interest Capitalized	$             2,02,000.00
	Total cost of building	$       1,04,02,000.00
	Average Accumulated Expenditure
	May 31st,2011=(From May 1st to October 31st)=6 Months from (1st june to 31st oct ober 5 months)=($3450000*5/6)	$          28,75,000.00
	July 31st,2011=(1st Aug to 29th Oct=3 months=($2250000*3/6)	$          11,25,000.00
	1st September=*From 1st sep to 29th oct)=($1800000*2/6)	$             6,00,000.00
	1st October to 31st Oct=($2700000*1/6)	$             4,50,000.00
	Total Average Accumulated Expenditure	$          50,50,000.00
	Interest Capitalized=($50,50000*8%*6/12)	$             2,02,000.00
	Equipment & Furniture	Fair Value	Fair Value %)	Amount of $750000 in % of fair value
	Equipment	$             5,95,000.00	($595000$850000)= 70%	$               5,25,000.00
	Furniture & Fixture	$             2,55,000.00	($255000/$850000)=30%	$               2,25,000.00
	Total	$             8,50,000.00		$               7,50,000.00
	Initial Value
	Equipment	$             5,25,000.00
	Furniture & Fixture	$             2,25,000.00
2)	Interest Expense
	Interest on note payable for purchase of land & building=($643005*8%*9/12)	$                38,580.30
	Construction loan=($5700000*8%*8/12)	$             3,04,000.00
	Long Term Note=($3500000*9%)	$             3,15,000.00
	Long Term Note=($5500000*6%)	$             3,30,000.00
	Total	$             9,87,580.30
	Less: Interest Capitalized	$           -2,02,000.00
	Interest Expense=($987580.30-$202000)	$             7,85,580.30