P 10-12 Acquisition costs; lump-sum acquisition; noninterest-bearing note; interest capitalization

 

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P 10-12  Early in its fiscal year ending December 31, 2011, 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 for $800,000. San Antonio paid $200,000 and signed a noninterest-bearing note requiring the company to pay the remaining $600,000 on March 28, 2013. 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 $20,000 were paid at closing.

 

During April, the old building was demolished at a cost of $70,000, and an additional $50,000 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:

 

May 30            $1,200,000

July 30                         1,500,000

September 1     900,000

October 1         1,800,000

 

San Antonio borrowed $3,000,000 at 8% on May 1 to help finance construction. This loan, plus interest, will be paid in 2012. The company also had the following debt outstanding throughout 2011:

 

$2,000,000, 9% long-term note payable

$4,000,000, 6% long-term bonds payable

 

In November, the company purchased 10 identical pieces of equipment and office furniture and fixtures for a lump-sum price of $600,000. The fair values of the equipment and the furniture and fixtures were $455,000 and $245,000, respectively. In December, San Antonio paid a contractor $285,000 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 2011. The company uses the specific interest method to determine the amount of interest capitalized on the building construction.

 

2. How much interest expense will San Antonio report in its 2011 income statement?

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