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 $250,000 immediately and signing a noninterest-bearing note requiring the company to pay $650,000 on March 28, 2023. 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 $25,000 were paid at closing. At the end of April, the old building was demolished at a cost of $75,000, and an additional $55,000 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 1	$	1,950,000
July 30		1,750,000
September 1		1,200,000
October 1		2,100,000

San Antonio borrowed $3,800,000 at 8% on May 1 to help finance construction. This loan, plus interest, will be paid in 2022. The company also had a $5,750,000, 8% long-term note payable outstanding throughout 2021. In November, the company purchased 10 identical pieces of equipment and office furniture and fixtures for a lump-sum price of $650,000. The fair values of the equipment and the furniture and fixtures were $450,000 and $300,000, respectively. In December, San Antonio paid a contractor $310,000 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?

Explanation

1.

Land
Purchase price (determined below)	$	807,271
Closing costs		25,000
Removal of old building		75,000
Clearing and grading		55,000
	$	962,271

Purchase price of land:

Cash paid	$	250,000
Value of note		557,271
	$	807,271

Present value of note payment: PV = $650,000 (0.85734*) = $557,271 *Present value of $1: n = 2, i = 8% (from PV of $1)

Land improvements
Parking lot and landscaping	$	310,000

Building
Construction expenditures:
May 1	$	1,950,000
July 30		1,750,000
September 1		1,200,000
October 1		2,100,000
Total expenditures		7,000,000
Interest capitalized (determined below)		187,039
Total cost of building	$	7,187,039

Average accumulated expenditures:
March 28, 2021*	$	832,271		7/7	=	$	832,271
April 30, 2021*		130,000		6/7	=		111,429
May 1, 2021		1,950,000		6/7	=		1,671,429
July 30, 2021		1,750,000		3/7	=		750,000
September 1, 2021		1,200,000		2/7	=		342,857
October 1, 2021		2,100,000		1/7	=		300,000
						$	4,007,985

Interest capitalized: $4,007,985 8% 7/12 = $187,039 *According to ASC 835-20-15-8, If activities are undertaken for the purpose of developing land for a particular use, the expenditures to acquire the land qualify for interest capitalization while those activities are in progress. The interest cost capitalized on those expenditures is a cost of acquiring the asset that results from those activities. If the resulting asset is a structure, such as a plant or a shopping center, interest capitalized on the land expenditures is part of the acquisition cost of the structure. The amount on March 28 includes the immediate payment of cash for the land ($250,000), present value of the note ($557,271), and closing costs ($25,000). The amount on April 30 includes removal of the old building ($75,000) and clearing and grading of the land ($55,000). Equipment and furniture and fixtures:

	Fair Value				Percent of Total Fair Value				Initial Valuation (% $650,000)
Equipment		$	450,000			60	%			$	390,000
Furniture & fixtures			300,000			40	%				260,000
Totals		$	750,000			100	%			$	650,000

Initial valuation:

Equipment	$	390,000
Furniture & fixtures		260,000

2.

Interest expense:
Note issued to purchase land and building, $557,271 8% 9/12 =	$	33,436
Construction loan, $3,800,000 8% 8/12		202,667
Long-term note, $5,750,000 8%		460,000
Total		696,103
Less: Interest capitalized (determined above)		(187,039	)
Interest expense	$	509,063