Question

Early in its fiscal year ending December 31, 2021, 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 by paying $390,000 immediately and signing a noninterest-bearing note requiring the company to pay $790,000 on March 28, 2023. 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 $39,000 were paid at closing.

At the end of April, the old building was demolished at a cost of $89,000, and an additional $69,000 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	$	4,050,000
July 30		2,450,000
September 1		2,040,000
October 1		2,940,000

San Antonio borrowed $6,500,000 at 8% on May 1 to help finance construction. This loan, plus interest, will be paid in 2022. The company also had a $7,150,000, 8% long-term note payable outstanding throughout 2021.

In November, the company purchased 10 identical pieces of equipment and office furniture and fixtures for a lump-sum price of $790,000. The fair values of the equipment and the furniture and fixtures were $623,000 and $267,000, respectively. In December, San Antonio paid a contractor $380,000 for the construction of parking lots and for landscaping.

Answer 1

a)
Land
Cash Paid	$ 390,000.00
Present value of note payable = $790,000 x PV(8%,2)	$ 677,297.67
Purchase Price of land ($390,000 + $677,297.67)	$ 1,067,297.67
Add: Closing Cost	$ 39,000.00
Removal of old building	$ 89,000.00
Clearing and grading	$ 69,000.00
Initial Cost of Land	$ 1,264,297.67
Building
Construction Expenditures
May 1, 2021	4,050,000
Jul 30, 2021	2,450,000
Sep 1, 2021	2,040,000
Oct 1, 2021	2,940,000
Total expenditures		$ 11,480,000.00
Capitalized interest (Calculated Below)		$ 257,800.00
Initial cost of Building		$ 11,737,800.00
Accumulated Expenditures
Payment Date	Expenditures (A)	Capitalization Period (B)	Weight (C=B/6)	Weighted Expenditures (A×C)
May 1	$ 4,050,000.00	6	100.00%	$ 4,050,000.00
July 30	$ 2,450,000.00	3	50.00%	$ 1,225,000.00
September 1	$ 2,040,000.00	2	33.33%	$ 680,000.00
October 1	$ 2,940,000.00	1	16.67%	$ 490,000.00
Total				$ 6,445,000.00
Interest Capitalized = $6,445000 x 8% x 6/12	$ 257,800.00
Equipment and Office furniture and fixtures
	Fair value	Percent of total fair value	Initial Valuation = % x $790,000
Equipment	$ 623,000.00	70.00%	$ 553,000.00
Office furniture and fixtures	$ 267,000.00	30.00%	$ 237,000.00
Total	$ 890,000.00	100.00%	$ 790,000.00
Land Improvements
Parking lots and Landscaping	$ 380,000.00
Initial cost of Land Improvements	$ 380,000.00
b)
Interest expense will San Antonio report in its 2021 income statement
Notes issued to purchase land and building =$677,297 x 8% x 9/12	$ 40,637.86
Construction loan (6,500,000 x 8% x 8/12)	$ 346,666.67
Long-term note ( 7,150,000 x 8%)	$ 572,000.00
Total	$ 959,304.53
Less; Interest capitalized	$ (257,800.00)
Interest expense reported 2021 income statement	$ 701,504.53