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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