ACCTG 331, Intermediate Accounting I

Simulation #4: Long Term Assets Interest Capitalization (25 PTS)

REQUIRED:Please complete the following simulation on asset acquisition problem.

GRADE RUBRIC:The grading rubric will be similar to in-class exercise for this simulation.

PARTICIPATION GRADE:Identify any members of your group who did not fully participate in the assignment.If someone did not fully participate, identify the student and assign either 0 or 50% to their effort.Their score will be reduced accordingly.

On January 3, 2021, Michelson & Sons acquired a tract of land just outside the city limits. The land and existing building were purchased for $2.4 million. Michelson paid $400,000 and signed a noninterest-bearing note requiring the company to pay the remaining $2,000,000 on December 31, 2022. An interest rate of 7% properly reflects the time value of money for this type of loan agreement. Transfer taxes, title insurance, and other costs totaling $24,000 were paid at closing.

During February, the old building was demolished at a cost of $120,000, and an additional $100,000 was paid to clear and grade the land. Construction of a new building began on March 1 and was completed on October 30. Construction expenditures were as follows:

March 30$800,000

June 301,200,000

July 301,200,000

September 1600,000

Michelson did not borrow specifically for the construction project, but did have the following debt outstanding throughout 2021:

$6,000,000, 8% long-term note payable

$2,000,000, 5% long-term note payable

In December, the company purchased equipment and office furniture and fixtures for a lump-sum price of $800,000. The fair values of the equipment and the furniture and fixtures were $540,000 and $360,000, respectively. In December, Michelson paid $340,000 for the construction of parking lots and landscaping.

Required:

1.Determine the initial values of the various assets that Michelson acquired or constructed during 2021.

a.Land

b.Land improvements

c.Building

d.Equipment

e.Furniture and Fixtures

2.How much interest expense will Michelson report in its 2021 income statement?