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 $320,000 immediately and signing a noninterest-bearing note requiring the company to pay $720,000 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 $32,000 were paid at closing.

At the end of April, the old building was demolished at a cost of $82,000, and an additional $62,000 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	$	3,000,000
July 30		2,100,000
September 1		1,620,000
October 1		2,520,000

San Antonio borrowed $5,100,000 at 8% on May 1 to help finance construction. This loan, plus interest, will be paid in 2022. The company also had a $6,450,000, 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 $720,000. The fair values of the equipment and the furniture and fixtures were $615,000 and $205,000, respectively. In December, San Antonio paid a contractor $345,000 for the construction of parking lots and for landscaping.

Required:
1. Determine the initial values of the various assets that San Antonio acquired or constructed during 2021. The company uses the specific interest method to determine the amount of interest capitalized on the building construction. (Hint: Expenditures on March 28 and April 30 to acquire land on which to construct the building are included as part of accumulated expenditures for determining the amount of interest capitalized on the building. This means the interest capitalization period begins on March 28.)
2. How much interest expense will San Antonio report in its 2021 income statement?

Answer 1

Part 1

Land	$1158861
Land improvements	$345000
Building	$9440400
Equipment	$540000
Furniture and fixtures	$180000

Purchase price of land:

Cash paid = 320000

Value of note = 662861 (720000*0.92064 (PVIF8%,2yr))

Purchase price of land = 982861

Land

Purchase price = 982861

Closing costs = 32000

Removal of old building = 82000

Clearing and grading = 62000

Total cost of land = 1158861

Land improvements

Parking lot and landscaping = 345000

Building

Construction expenditures:

May 1 - 3000000

june 30 - 2100000

september 1 - 1620000

october 1 - 2520000

Total expenditures – 9240000

Interest capitalized - 200400

Total cost of building =9440400

Accumulated expenditures:

May 1 – 3000000 * 6/6 = 3000000

june 30 – 2100000*3/6 = 1050000

september 1 – 1620000*2/6 = 540000

october 1 – 2520000*1/6 = 420000

Interest capitalized = 5010000*8%*6/12 = 200400

Equipment and furniture and fixture

	Fair value	% of total fair value	Initial valuation (720000)
Equipment	615000	75% (615000/820000)	540000	(720000*75%)
Furniture and fixtures	205000	25% (205000/820000)	180000	(720000*25%)
total	820000	100%	720000

Initial valuation:

Equipment = 540000

Furniture and fixtures = 180000

Part 2

Interest expense

$627372

Interest expense:

Note issued to purchase land and buildings (662861*8%*9/12) = 39772

Construction loan (5100000*8%*8/12) = 272000

Long –term note (6450000*8%) = 516000

Total = 827772

Less: interest capitalized = 200400

Interest expense = $627372