P 10-12 Early in its fiscal
year ending December 31, 2011, 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 $800,000. San Antonio paid $200,000 and signed a
noninterest-bearing note requiring the company to pay the remaining $600,000 on
March 28, 2013. 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 $20,000 were paid at closing.
During April, the old building
was demolished at a cost of $70,000, and an additional $50,000 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:
May 30 $1,200,000
July 30 1,500,000
September 1 900,000
October 1 1,800,000
San Antonio borrowed $3,000,000
at 8% on May 1 to help finance construction. This loan, plus interest, will be
paid in 2012. The company also had the following debt outstanding throughout
2011:
$2,000,000, 9% long-term note
payable
$4,000,000, 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 $600,000. The fair values of the equipment and the
furniture and fixtures were $455,000 and $245,000, respectively. In December,
San Antonio paid a contractor $285,000 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 2011. 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 2011 income statement?
TUTORIAL PREVIEW
Problem
10-12
Requirement 1
Land
Purchase
price (determined below) $714,404
Closing
costs 20,000
Removal
of old building 70,000
Clearing
and grading 50,000
File name: P10-12 San
Antonio Outfitters.docx File type: .docx PRICE: 10
