Question
On January 3, 2024, Michelson & Sons acquired a tract of land just outside the city limits. The land and existing building were purchased for
On January 3, 2024, 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, 2025. 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.
At the end of 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 30 | 1,200,000 |
July 30 | 1,200,000 |
September 1 | 600,000 |
Michelson did not borrow specifically for the construction project, but did have the following debt outstanding throughout 2024:
$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:
- Determine the initial values of the various assets that Michelson acquired or constructed during 2024.
- How much interest expense will Michelson report in its 2024 income statement?
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