Question

Pronghorn Landscaping Corp. began constructing a new plant on December 1, 2017. On this date, the company purchased a parcel of land for $183,780 cash. In addition, it paid $1,780 in surveying costs and $3,570 for title transfer fees. An old dwelling on the premises was immediately demolished at a cost of $2,750, with $990 being received from the sale of materials. Architectural plans were also formalized on December 1, 2017, when the architect was paid $29,960. The necessary building permits costing $2,560 were obtained from the city and paid on December 1, 2017. The excavation work began during the first week in December and payments were made to the contractor as follows:

Date of Payment Amount of Payment

Mar. 1 $240,000

May 1 359,680

July 1 59,880

The building was completed on July 1, 2018. To finance the plant construction, Pronghorn borrowed $599,770 from a bank on December 1, 2017. Pronghorn had no other borrowings. The $599,770 was a 10-year loan bearing interest at 10%.

Q : Identify what the effects would be on Pronghorn’s financial statements for the years ending December 31, 2017 and 2018, if its policy were to expense all borrowing costs as they are incurred. Assume that Pronghorn prepares financial statements in accordance with ASPE.

2017 2018

Land

Buildings

Interest expense

Answer 1

1	Cost of Land	2017	2018
	Purchase Price	$183,780	$183,780
	Surveying Cost	$1,780	$1,780
	Title Transfer Fees	$3,570	$3,570
	Demolishing Cost	$2,750	$2,750
	Less: Sale of Material	$990	$990
	Cost of Land	$190,890	$190,890
2	Cost of Building	2017	2018
	Architect Fees	$29,960	$29,960
	Building Permits	$2,560	$2,560
	Interest to be capitalized in 2017	$1,861.75	$1,861.75
	interest to be capitalized in 2018		$31,246.25
	Payment on March 1		$240,000
	Payment on May 1		$359,680
	Payment on July 1		$59,880
	Total	$34,382	$725,188
3	Interest Expense
		2017	2018
	Interest Expense	$3,136.33	$28,730.75
	Working Note:
	Weighted expenditure for Interest Capitalization in 2017
Date	Amount	Period	Weighted Expenditure
1-Dec	$190,890	1/12	$15,907.50
1-Dec	$29,960	1/12	$2,496.67
1-Dec	$2,560	1/12	$213.33
Total	$223,410		$18,618
	Interest to be capitalizated (18618 x 10%)		$1,861.75
	Interest expense (599770 x 10% x 1/12)		4,998.08
	Less: Interest to be capitalized		($1,861.75)
	Interest expense 2017		3,136.33
	Weighted expenditure for Interest Capitalization in 2018
Date	Amount	Period	Weighted Expenditure
1-Jan	$223,410	1/2	$111,705.00
1-Jan	$1,862	1/2	$930.88
1-Mar	$240,000	1/3	$80,000.00
1-May	$359,680	1/6	$59,946.67
1-Jul	$59,880		$59,880.00
Total	$884,832		$312,462.54
	Interest to be capitalizated (312463 x 10%)		$31,246.25
	Interest expense (599770 x 10%)		59,977.00
	Less: Interest to be capitalized		($31,246.25)
	Interest expense 2018		28,730.75