1.
Acquisition Cost:
Acquisition cost is the total cost of the asset incurred to obtain an asset. Acquisition cost is also called as historical cost or original cost.
Interest Capitalization:
Interest capitalization refers to the interest amount that is added to the cost of the long-term asset. Such interest capitalization amount includes the interest amount of the debt which was financed for acquiring the asset.
To Determine: The initial value of the various assets that were acquired or constructed during the year 2018 by S outfitters.
1.
Explanation of Solution
Determine the initial value of the various assets that were acquired or constructed during the year 2018 by S outfitters.
Determine the initial value of land.
Particulars | Amount ($) |
Purchase price | 714,404 |
Add: Closing costs | 20,000 |
Add: Removal of old building | 70,000 |
Add: Clearing and grading | 50,000 |
Total value of land | 854,404 |
Table (1)
Working Notes:
Determine the present value of note that was used to purchase the land.
Note: PV factor (Present value of $1: n = 2, i = 8%) is taken from the table value (Table 2 in Appendix from textbook).
Determine the purchase price of land.
Thus, the initial value of land is $854,404.
Determine the initial value of land improvements.
Particulars | Amount ($) |
Parking lot and landscaping | 285,000 |
Table (2)
Thus, the initial value of land improvements is $285,000.
Determine the initial value of building.
Determine the amount of interest capitalized.
Month | Construction Expenditure ($) | Interest Outstanding (Number of months) | Accumulated Expenditure ($) | ||
May 1 | 1,200,000 | = | 1,200,000 | ||
July 30 | 1,500,000 | = | 750,000 | ||
September 1 | 900,000 | = | 300,000 | ||
October 1 | 1,800,000 | = | 300,000 | ||
Average accumulated expenditures | $2,550,000 |
Table (3)
Determine the initial value of building.
Particulars | Amount ($) |
Construction expenditure | |
May 1, 2016 | 1,200,000 |
July 30, 2016 | 1,500,000 |
September 1, 2016 | 900,000 |
October 1, 2016 | 1,800,000 |
Total expenditures | 5,400,000 |
Add: Interest capitalized | 102,000 |
Total cost of building | 5,502,000 |
Table (4)
Thus, the initial value of buildings is $5,502,000.
Determine the initial value of equipment and furniture and fixtures.
Determine the initial value of Equipment.
Thus, the initial value of equipment is $390,000.
Working Note:
Determine the initial value of Furniture and fixtures.
Working Note:
Thus, the initial value of furniture and fixtures is$210,000.
2.
The interest expense reported in the 2018 income statement of S Outfitters.
2.
Explanation of Solution
Determinethe interest expense reported in the 2018 income statement of S Outfitters.
Particulars | Amount ($) |
Note issued to purchase land and building | 30,864 |
Construction loan | 160,000 |
Long-term note | 180,000 |
Long-term bonds | 240,000 |
Total | 610,864 |
Less: Interest capitalized | (102,000) |
Interest expense | 508,864 |
Table (5)
Working Notes:
Calculate the interest of construction loan.
Calculate the interest of the note.
Calculate the interest of the long-term note.
Calculate the interest of the long-term bonds.
Thus, the amount of interest expense reported in the 2018 income statement is $508,864.
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Chapter 10 Solutions
INTERMEDIATE ACCOUNTING(LL)-W/CONNECT
- Exercise 10-3 (Algo) Acquisition costs; lump-sum acquisition [LO10-1, 10-2] Samtech Manufacturing purchased land and building for $4 million. In addition to the purchase price, Samtech made the following expenditures in connection with the purchase of the land and building: Title insurance Legal fees for drawing the contract Pro-rated property taxes for the period after acquisition State transfer fees An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3.7 and $1.3 million, respectively. Shortly after acquisition, Samtech spent $85,000 to construct a parking lot and $43,000 for landscaping. Required: 1. Determine the initial valuation of each asset Samtech acquired in these transactions. 2. Determine the initial valuation of each asset, assuming that immediately after acquisition, Samtech demolished the building. Demolition costs were $280,000 and the salvaged materials were sold for $7,500. In addition, Samtech spent $82,000…arrow_forwardExercise 10-3 (Algo) Acquisition costs; lump-sum acquisition [LO10-1, 10-2] Samtech Manufacturing purchased land and building for $4 million. In addition to the purchase price, Samtech made the following expenditures in connection with the purchase of the land and building: Title insurance Legal fees for drawing the contract Pro-rated property taxes for the period after acquisition State transfer fees An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3.7 and $1.3 million, respectively. Shortly after acquisition, Samtech spent $85,000 to construct a parking lot and $43,000 for landscaping. Required: 1. Determine the initial valuation of each asset Samtech acquired in these transactions. 2. Determine the initial valuation of each asset, assuming that immediately after acquisition, Samtech demolished the building. Demolition costs were $280,000 and the salvaged materials were sold for $7,500. In addition, Samtech spent $82,000…arrow_forwardProblem 10-3 (Algo) Acquisition costs [LO10-1, 10-4, 10-6] The plant asset and accumulated depreciation accounts of Pell Corporation had the following balances at December 31, 2020: Accumulated Depreciation $ Land Land improvements Building Equipment Automobiles Plant Asset $ 480,000 245,000 2,150,000 1,184,000 215,000 Transactions during 2021 were as follows: a. On January 2, 2021, equipment were purchased at a total invoice cost of $325,000, which included a $6,800 charge for freight. Installation costs of $40,000 were incurred. b. On March 31, 2021, a small storage building was donated to the company. The person donating the building originally purchased it three years ago for $32,000. The fair value of the building on the day of the donation was $21,000. c. On May 1, 2021, expenditures of $63,000 were made to repave parking lots at Pell's plant location. The work was necessitated by damage caused by severe winter weather. The repair doesn't provide future benefits beyond those…arrow_forward
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