Question

a) On January 1, Blair began construction of a new plant. On this date, the company purchased a parcel of land for $200,000 in cash. In addition, it paid $3,000 in surveying costs and $1,000 for the title insurance policy. An old dwelling on the premises was demolished at a cost of $5,000, with $2,000 being received from the sale of materials. Architectural plans were also formalized on January 1, when the architect was paid $40,000. The necessary building permits costing $4,000 were obtained from the city and paid for on January 1 as well. The excavation work began during the first week in December with payments made to the contractor as follows: Date of payment Amount of payment February 28 $300,000 June 1 400,000 August 31 200,000 The building was completed on September 30, 2015. To finance construction of this plant, Blair borrowed $1,000,000 from Small World Bank on January 1, 2015. Blair had no other borrowings. The $1,000,000 was a 15-year loan bearing interest at 6%. b) Upon completion of the new plant, Blair put the land and building held on January 1 up for resale. c) During October, major updates were made to the equipment at a cost of $12,000. The useful life of the equipment is not extended by these updates, but productive capacity was improved. Based on the above, determine the amounts that Blair Company should report at December 31, 2015 related to the following accounts: A. Land B. Buildings C. Equipment D. Investments E. Interest Expense F. Repairs and Maintenance Expense

Answer 1

The amount that Blair Company should report at 31^st December 2015 related to the following accounts are:

1. Land:

Particulars   Amount($)

Purchase price- $200000  

Surveying Costs- $3000

Title insurance policy- $1000

Cost of demolition- $5000

Less: Amount received from sale of materials-($2000)

Total $207000

2. Buildings:   

Particulars                                                                     Amount($)

Architectural plans- $40000

Building permits- $4000

Excavation payments:

February- $300000

June- $400000

August- $200000

Total $944000

3. Equipments:  

Interest expense from 1^st January till the date of completion of construction i.e 30^th September shall added to the cost of construction and capitalized;

Hence, ($1000000*6%*9/12) = $45000 shall be added to equipment.

Particulars                                                                     Amount($)

Bank loan for purchase- $1000000

Interest cost- $45000

Total $1045000

4. Investments:

6% Bank loan- $1000000

5. Interest expense:  

Interest from the date of completion of construction 30^th September till the date of balance sheet i.e 31^st December shall be chargeable to profit and loss account as Interest expense:

Calculation:

$1000000*6%*3/12= $15000 shall be treated as interest expense.

6.Repairs and maintenance expense:

Updates made to the equipment which did not extended the useful life of the equipment shall be treated as Revenue expenditure and it shall be charged to Repairs and maintenance expense in the profit and loss account as $12000.