Workshop4_ch9_keys

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University of Idaho *

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315

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Apr 3, 2024

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1 ACCT315 Workshop 4 ‐ Chapter 9 PP&E Capitalization Total Points: 20 Due Date: Tuesday, March 21, 2023 (At the beginning of class) Name:_______________________________ In ‐ class portion: During January 20X1, Blair Corporation incurred transactions and provided the information that follows:  Purchase of a tract of land (site number 101) with a building on January 1, 20X1 for $700,000  Payment of real estate broker's commission: 50,400  Legal fees: 8,400  Title guarantee insurance: 25,200  Cost to raze the building shortly after acquisition: 75,600 Blair entered into a fixed-price contract with Slatkin Builders, Inc. on March 1, 20X1, for the construction of an office building on land site number 101. The building was completed and occupied on December 31, 20X2. Construction contract price: $7,000,000 Additional construction costs were incurred as follows:  Plans, specifications, and blueprints 29,400  Architects' fees for design and supervision 114,800 Estimated useful life of the building from date of completion: 40 years Borrowing to finance construction costs on March 1, 20X1: $6,300,000 Payment terms on loan: Number of installment payments 9 Amount of each annual installment, starting March 1, 20X2 $700,000 Interest rate 6% Date cost incurred Actual Expenditure 04/01/20X1 1,568,000 07/01/20X1 700,000 10/01/20X1 840,000 12/01/20X1 1,008,000 01/01/20X2 980,000 04/01/20X2 1,120,000 07/01/20X2 1,680,000

2 (a) Prepare a schedule that discloses the individual costs making up the balance in the land account in respect of land site number 101 as of December 31, 20X2. BLAIR CORPORATION Cost of Land (Site #101) As of December 31, 20X2 Cost of land and old building $ 700,000 Real estate broker’s commission 50,400 Legal fees 8,400 Title insurance 25,200 Removal of old building 75,600 Cost of land $859,600 (b) What are the total amounts of weighted average construction expenditures for 20X1 and 20X2? Date cost incurred Actual Expenditure Capitalization Period Weighted Avg 04/01/20X1 1,568,000 9/12 1,176,000 07/01/20X1 700,000 6/12 350,000 10/01/20X1 840,000 3/12 210,000 12/01/20X1 1,008,000 1/12 84,000 01/01/20X2 980,000 12/12 980,000 04/01/20X2 1,120,000 9/12 840,000 07/01/20X2 1,680,000 6/12 840,000 For the period March 1 to December 31, 20X1 1,820,000 For the period January 1 to December 31, 20X2 2,660,000 (c) What are the total amount of interest capitalized for the construction project for 20X1 and 20X2 20X1 $1,820,000 × 6% = $ 109,200 20X2 2,660,000 × 6% = $ 159,600 (d) What are the total amount of actual interest costs associated with borrowing to finance this construction project for 20X1 & 20X2? (e) Prepare a schedule that discloses total costs that should be capitalized for the building. building account as of December 31, 20X2. Show supporting computations in good form BLAIR CORPORATION Cost of Building As of December 31, 20X2 Fixed construction contract price $ 7,000,000 20X1 6,300,000 $ × 6% × 10/12 = 315,000 $ 20X2 6,300,000 $ × 6% × 2/12 = 63,000 $ 5,600,000 $ × 6% × 10/12 = 280,000 Total 20X2 interest 343,000 $

3 Plans, specifications, and blueprints 29,400 Architects’ fees 114,800 Interest capitalized during 20X1 109,200 Interest capitalized during 20X2 159,600 Cost of building $ 7,413,000 Take ‐ home portion: During January 20X1, Blair Corporation incurred transactions and provided the information that follows:  Purchase of a tract of land (site number 101) with a building on January 1, 20X1for $500,000  Payment of real estate broker's commission: 36,000  Legal fees: 6,000  Title guarantee insurance: 18,000  Cost to raze the building shortly after acquisition: 54,000 Blair entered into a fixed-price contract with Slatkin Builders, Inc. on March 1, 20X1, for the construction of an office building on land site number 101. The building was completed and occupied on December 31, 20X2. Construction contract price: $5,000,000 Additional construction costs were incurred as follows:  Plans, specifications, and blueprints 21,000  Architects' fees for design and supervision 82,000 Estimated useful life of the building from date of completion: 40 years Borrowing to finance construction costs on March 1, 20X1: $4,500,000 Payment terms on loan: Number of installment payments 9 Amount of each annual installment, starting March 1, 20X2 $500,000 Interest rate 9% Date cost incurred Actual Expenditure 04/01/20X1 1,120,000 07/01/20X1 500,000 10/01/20X1 600,000 12/01/20X1 720,000 01/01/20X2 700,000 04/01/20X2 800,000 07/01/20X2 1,200,000 Instructions (12 points):

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4 (a) Prepare a schedule that discloses the individual costs making up the balance in the land account in respect of land site number 101 as of December 31, 20X2 (3points). BLAIR CORPORATION Cost of Land (Site #101) As of December 31, 20X2 Cost of land and old building $ 500,000 (.5pt) Real estate broker’s commission 36,000 (.5pt) Legal fees 6,000 (.5pt) Title insurance 18,000 (.5pt) Removal of old building 54,000 (.5pt) Cost of land $ 614,000 (.5pt) (b) What are the total amounts of weighted average construction expenditures for 20X1 and 20X2 (2 points, show your work)? Date Cost incurred Actual Expenditure Capitalization Period Weighted Avg 04/01/X1 1,120,000 9/12 840,000 07/01/X1 500,000 6/12 250,000 10/01/X1 600,000 3/12 150,000 12/01/X1 720,000 1/12 60,000 01/01/X2 700,000 12/12 700,000 04/01/X2 800,000 9/12 600,000 01/07/X2 1,200,000 6/12 600,000 Weighted-average amounts of accumulated building construction expenditures: For the period March 1 to December 31, 20X1 $1,300,000 (1pt) For the period January 1 to December 31, 20X2 1,900,000 (1pt) (c) What are the total amount of interest capitalized for the construction project for 20X1 and 20X2 (2 points)? Calculation of capitalized interest: Interest to be capitalized: 20X1 $1,300,000 × 9% = $117,000 (1 pt) 20X2 1,900,000 × 9% = $171,000 (1 pt)

5 (d) What are the total amount of actual interest costs associated with borrowing to finance this construction project for 20X1 & 20X2 (3 points)? Actual interest: 20X1 $4,500,000 × 9% × 10/12 = $337,500 (1pt) 20X2 $4,500,000 × 9% × 2/12 = $67,500 (1pt) $4,000,000 × 9% × 10/12 = 300,000 (1pt) Total 20X2 interest $367,500 (e) Prepare a schedule that discloses total costs that should be capitalized for the building. building account as of December 31, 20X2. Show supporting computations in good form (2 points). BLAIR CORPORATION Cost of Building As of December 31, 20X2 Fixed construction contract price $ 5,000,000 (.25pt) Plans, specifications, and blueprints 21,000 (.25pt) Architects’ fees 82,000 (.25pt) Interest capitalized during 20X1 117,000 (.5pt) Interest capitalized during 20X2 171,000 (.5pt) Cost of building $ 5,391,000 (.25pt)