Question

Second Chance Inc. purchased a lot with an old warehouse on the premises for $420,000 on

January 1, 2016. The company immediately demolished the building and cleared the site at a

cost of $150,000. Castle then commenced construction of a new warehouse for their own use on

March 1, 2016. The warehouse took 14 months to construct and was ready to be used on April

30, 2017. Expenditures for the construction were as follows:

March 1, 2016 deposit $400,000

May 30, 2016 $600,000

December 31, 2016 $800,000

February 1, 2017 $300,000

April 1, 2017 $400,000

The Company uses the specific interest method of computing capitalized interest and had the

following indebtedness during the period of construction:

Loan #1 borrowed $3,000,000 March 31, 2014 at a rate of 6%, due September 30, 2017

Loan #2 borrowed $2,000,000 January 31, 2016 to build the warehouse at a rate of 7%, due

January 31, 2026

When the warehouse is placed in service, it will be depreciated on a straight line basis over 30

years with zero assumed salvage value.

1) What was Castle’s reported interest expense after capitalization of interest for 2017

(rounded)?

A) $225,000.

B) $270,000.

C) $275,000.

D) $320,000.

2) What was the total cost in construction of the building (rounded)?

A) $2,500,000.

B) $2,600,000.

C) $2,700,000.

D) $3,100,000.

3) The company sold the land and the warehouse on April 30, 2029 for cash proceeds of

$2,000,000. What was the overall gain or (loss), rounded?

A) ($87,000).

B) $441,000.

C) $187,000.

D) ($128,000).

Answer 1

Assumption Cost of Purchase of Lot and demolished cost has not been incurred from Loan Value
Ans 1 Interest Exp for the 2017 after capitalization
Total Construction Cost $2,500,000
Loan @7% $2,000,000
Loan @6% $500,000
Period of Cosntruction 14 Month
Interest Exp
1 $2000000*8/12*7% $93,333
2 $500000*5/12*6% $12,500
3 $2500000*9/12*6% $112,500
$218,333
Rounded Off $220,000

1 For $20 Lacs loan Interest Exp month is 8 and Capilazation Month is 4.
2 For $30 Lacs Loan, $5 Lacs Loan Interest Month is 5 and Capitalation Month is 4.
3 Remianing $25 Lacs Interest month is 9 becase Loan due on 30/09/2017.



Assumption Cost of Purchase of Lot and demolished cost has not been incurred from Loan Value
Ans 2 Total Cost of Construction of Building
Total Construction Cost $2,500,000
Interest Cost Capilaize
$2000000*14/12*7% $163,333
$500000*14/12*6% $35,000
$2,698,333
Rounded Off $2,700,000

Assumption Cost of Purchase of Lot and demolished cost has not been incurred from Loan Value
Ans 3 Overall Gain/Loss
Total Cost of Construction $2,700,000
Depreciation for 12 year @30 year SLM $1,080,000
Remaining Value $1,620,000
Cost of Purchase and Demolished $570,000
Total Cost $2,190,000
Cash Received $2,000,000
Loss $190,000