Early in its fiscal year ending December 31, 2021, San Antonio Outfitters finalized plans to expand operations. The first stage

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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 $370,000 immediately and signing a noninterest-bearing note requiring the company to pay $770,000 on March 28, 2023. An
interest rate of 8% properly reflects the time value of money for this type of loan agreement. Tide search, insurance, and other closing
costs totaling $37.000 were paid at closing
At the end of April, the old building was demolished at a cost of $87,000, and an additional $67.000 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. EVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
May 1
July 30
September 1
October 1
$3,750,000
2,350.000
1,920,000
2,820.000
San Antonio borrowed $6,100,000 at 8% on May 1 to help finance construction. This loan, plus interest, will be paid in 2022. The
company also had a $6,950,000, 8% long-term note payable outstanding throughout 2021
In November, the company purchased 10 identical pieces of equipment and office furniture and fortures for a lump-sum price of
$770 000. The fair values of the equipment and the fumiture and fixtures were $522,000 and $348,000, respectively. In December, San
Antonio paid a contractor $370,000 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?
Complete this question by entering your answers in the tabs below.
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Determine the initial values of the variou 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.) (Do not round intermediate calculations. Round your final answers to the nearest whole dollar.)

Business

1 answer:

Scilla [3.8K] · Answer 1 · 2026-03-10T22:47:50+03:00

Answer:

1) asset valuation:

land = $1,221,151

equipment = $462,000

furniture and fixtures = $308,000

landscape and parking = $370,000

building = $11,241,600

2) interest incurred:

interest paid for land purchase notes = $52,812

interest on other notes payable = $479,733

total interest = $532,545

Explanation:

The land basis (non-depreciable):

Cash payments = $370,000
Present value of notes payable = $770,000 / 1.08² = $660,151
Costs at closing = $37,000
Demolition costs = $87,000
Land clearing costs = $67,000
Total = $1,221,151

Costs like demolition and land clearing increase the land basis, and cannot be part of the construction costs. Land and building are considered separate assets; they shouldn’t be combined. Only expenses directly related to the building's construction can be included in interest capitalization calculations. Similarly, improvements to land are also considered distinct assets.

The interest charge on notes received = $660,151 x 8% = $52,812

basis for equipment, furniture, and fixtures (assets subject to depreciation):

equipment = ($522 / $870) x $770,000 = $462,000
furniture and fixtures = ($348 / $870) x $770,000 = $308,000

Expenses for parking lot and landscaping (capital improvements):

$370,000

total construction expenses for the building in 2021:

May 1: $3,750,000
July 30: $2,350,000
September 1: $1,920,000
October 1: $2,820,000
total = $10,840,000

weighted construction costs for 2021:

May 1: $3,750,000 x 8/12 = $2,500,000
July 30: $2,350,000 x 6/12 = $1,175,000
September 1: $1,920,000 x 4/12 = $640,000
October 1: $2,820,000 x 3/12 = $705,000
total = $5,020,000

Capitalized interest = $5,020,000 x 8% = $401,600

building basis:

total construction expenses = $10,840,000
capitalized interest = $401,600
overall total = $11,241,600

interest from other notes = ($6,100,000 x 8% x 8/12) + ($6,950,000 x 8%) - $401,600 = $479,733.33 ≈ $479,733