Early in its fiscal year ending December 31, 2013, San Antonio Outfitters finali

Question

Early in its fiscal year ending December 31, 2013, 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 $1,100,000. San Antonio paid $350,000 and signed a noninterest bearing note requiring the company to pay the remaining $750,000 on March 28, 2015. 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 $35,000 were paid at closing. During April, the old building was demolished at a cost of $85,000, and an additional $65,000 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 30 $ 3,450,000 July 30 2,250,000 September 1 1,800,000 October 1 2,700,000 San Antonio borrowed $6,300,000 at 8% on May 1 to help finance construction. This loan, plus interest, will be paid in 2014. The company also had the following debt outstanding throughout 2013: $3,500,000, 9% long-term note payable $5,500,000, 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 $750,000. The fair values of the equipment and the furniture and fixtures were $595,000 and $255,000, respectively. In December, San Antonio paid a contractor $360,000 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 2013. 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 2013 income statement?

Explanation / Answer

1.

Determination of the initial values of the various assets that San Antonio acquired or constructed during 2013 VALUE OF LAND AND BUILDING Determination the time-weighting average accumulated expenditures during construction period May 30 ,2013 3450000 0.83 2875000 July 30 ,2013 2250000 0.50 1125000 September 1, 2013 1800000 0.33 600000 October 1, 2013   2700000 0.17 450000 Average Accumulated Expenditures 5050000 Determination of amount of interest to be capitalised 5050000 8% 404000 Determination of total cost Purchase Cost 1100000 Construction Cost 10200000 Interest Cost to be capitalised 404000 Insurance and other Cost 35000 VALUE OF LAND AND BUILDING 11739000 VALUE OF OTHER ASSETS Value of10 identical pieces of equipment 595000 furniture and fixtures 255000

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