Question: (Classification of Costs and Interest Capitalization) On January 1, 2017, Blair Corporation purchased for \(500,000 a tract of land (site number 101) with a building. Blair paid a real estate broker’s commission of \)36,000, legal fees of \(6,000, and title guarantee insurance of \)18,000. The closing statement indicated that the land value was \(500,000 and the building value was \)100,000. Shortly after acquisition, the building was razed at a cost of \(54,000.

Blair entered into a \)3,000,000 fixed-price contract with Slatkin Builders, Inc. on March 1, 2017, for the construction of an office building on land site number 101. The building was completed and occupied on September 30, 2018. Additional construction costs were incurred as follows:

Plans, specifications, and blueprints \(21,000

Architects’ fees for design and supervision 82,000

The building is estimated to have a 40-year life from date of completion and will be depreciated using the 150% declining balance method.

To finance construction costs, Blair borrowed \)3,000,000 on March 1, 2017. The loan is payable in 10 annual installments of \(300,000 starting on March 1, 2018, plus interest at the rate of 10%. Blair’s weighted-average amounts of accumulated building construction expenditures were as follows.

For the period March 1 to December 31, 2017 \)1,300,000

For the period January 1 to September 30, 2018 1,900,000

Instructions

1. 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 September 30, 2018.
2. Prepare a schedule that discloses the individual costs that should be capitalized in the office building account as of September 30, 2018. Show supporting computations in good form.

Step by step solution

01

Meaning of Acquisition of Cost

In accounting terms, acquisition cost alludes to the cost of acquiring a particular thing. There are three common trade contexts when it is utilized: mergers and acquisitions, fixed resources, and client acquisition.

02

(a) Preparing a schedule

BLAIR CORPORATION Cost of Land (Site #101) As of September 30, 2018
Cost of land and old building	$500,000
Real estate broker’s commission	36,000
Legal fees	6,000
Title insurance	18,000
Removal of old building	54,000
Cost of land	$614,000

03

(b) Preparing a schedule

BLAIR CORPORATION Cost of Building As of September 30, 2018
Fixed construction contract price	$3,000,000
Plans, specifications, and blueprints	21,000
Architects’ fees	82,000
Interest capitalized during 2017 (Schedule 1)	130,000
Interest capitalized during 2018 (Schedule 2)	190,000
Cost of building	$3,423,000

Working notes:

Preparing schedule 1

Interest Capitalized During 2017 and 2018
Date	Weighted-average accumulated construction Interest rate expenditures	Interest to be capitalized
2017	$1,300,000 10%	$130,000

Calculation of actual interest

$$\begin{gathered} \mathbf{\text{Actualinterest=Contractprice×Interestrate×}}\frac{\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{h}}{\mathbf{M}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{h}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{a}\mathbf{}\mathbf{y}\mathbf{e}\mathbf{a}\mathbf{r}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\mathbf{\times }\frac{\mathbf{10}}{\mathbf{12}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{250}\mathbf{,}\mathbf{000} \end{gathered}$$

Preparing schedule 2

Interest Capitalized during 2017 and 2018
Date	Weighted-average accumulated construction Interest rate expenditures	Interest to be capitalized
2018	$1,900,000 10%	$190,000

Calculation of actual interest first for two months

$$\begin{gathered} \mathbf{\text{Actualinterest=Contractprice×Interestrate×}}\frac{\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{h}}{\mathbf{M}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{h}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{a}\mathbf{}\mathbf{y}\mathbf{e}\mathbf{a}\mathbf{r}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\mathbf{\times }\frac{\mathbf{2}}{\mathbf{12}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{50}\mathbf{,}\mathbf{000} \end{gathered}$$

Calculation of actual interest first for ten months

$$\begin{gathered} \mathit{A}\mathit{c}\mathit{t}\mathit{u}\mathit{a}\mathit{l}\mathbf{}\mathit{i}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{=}\mathit{C}\mathit{o}\mathit{n}\mathit{t}\mathit{r}\mathit{a}\mathit{c}\mathit{t}\mathbf{}\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{\times }\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{}\mathit{r}\mathit{a}\mathit{t}\mathit{e}\mathbf{\times }\frac{\mathbf{N}\mathbf{u}\mathbf{m}\mathbf{b}\mathbf{e}\mathbf{r}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{m}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{h}}{\mathbf{M}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{h}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{}\mathbf{a}\mathbf{}\mathbf{y}\mathbf{e}\mathbf{a}\mathbf{r}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{700}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\mathbf{\times }\frac{\mathbf{10}}{\mathbf{12}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{225}\mathbf{,}\mathbf{000} \end{gathered}$$

So, total actual interest for 2018 is $275,000 ($50,000+$225,000)

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