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):
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
