Problem 10-12 Acquisition costs; lump-sum acquisition; noninterest-bearing note; interest capitalization [LO10-1, 10-2, 10-3, 10-7]

Early in its fiscal year ending December 31, 2018, 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 $860,000. San Antonio paid $230,000 and signed a noninterest-bearing note requiring the company to pay the remaining $630,000 on March 28, 2020. An interest rate of 6% properly reflects the time value of money for this type of loan agreement. Title search, insurance, and other closing costs totaling $23,000 were paid at closing.

During April, the old building was demolished at a cost of $73,000, and an additional $53,000 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 $ 1,650,000 July 30 1,650,000 September 1 1,080,000 October 1 1,980,000

San Antonio borrowed $3,400,000 at 6% on May 1 to help finance construction. This loan, plus interest, will be paid in 2019. The company also had the following debt outstanding throughout 2018:

$2,300,000, 9% long-term note payable

$4,300,000, 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 $630,000. The fair values of the equipment and the furniture and fixtures were $511,000 and $219,000, respectively. In December, San Antonio paid a contractor $300,000 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 2018. 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 2018 income statement?

1.

Assets	Initial Value
Land
Land improvements
Building
Equipment
Furniture & fixtures

2.

Interest Expense

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