Answer:
1) assets basis:
land = $1,221,151
equipment = $462,000
furniture and fixtures = $308,000
parking lots and landscaping = $370,000
building = $11,241,600
2) interest expense:
interest on notes payable issued to buy land = $52,812
interest expense on other notes payable = $479,733
total = $532,545
Explanation:
the basis of the land (not depreciable):
- $370,000 paid in cash
- PV of notes payable = $770,000 / 1.08² = $660,151
- closing costs = $37,000
- demolition of existing structures = $87,000
- land clearing and grading = $67,000
- total = $1,221,151
Demolition costs as well as land grading and clearing add to the basis of the land, they are not included as part of construction costs. Therefore, they cannot be capitalized and added to the building's basis. The land is one asset and the building is a separate one, you cannot mix them. Only construction costs incurred when building the building (I don't know how else to say it) can be considered as accumulated expenditures for interest capitalization. The same applies to land improvements, they cannot be included in the construction's accumulated expenditures, they are separate assets.
interest expense on notes payable = $660,151 x 8% = $52,812
basis of equipment, furniture and fixtures (depreciable assets):
- equipment = ($522 / $870) x $770,000 = $462,000
- furniture and fixtures = ($348 / $870) x $770,000 = $308,000
parking lots and landscaping (depreciable land improvements):
total building construction expense during 2021:
- May 1
: $3,750,000
- July 30: $2,350.000
- September 1: $1,920,000
- October 1
: $2,820.000
- total = $10,840,000
weighted construction expenditures 2021:
- May 1
: $3,750,000 x 8/12 = $2,500,000
- July 30: $2,350.000 x 6/12 = $1,175,000
- September 1: $1,920,000 x 4/12 = $640,000
- October 1
: $2,820.000 x 3/12 = $705,000
- total = $5,020,000
capitalized interests = $5,020,000 x 8% = $401,600
basis of building:
- total construction expenses = $10,840,000
- capitalized interests = $401,600
- total = $11,241,600
interest expense on other notes payable = ($6,100,000 x 8% x 8/12) + ($6,950,000 x 8%) - $401,600 = $479,733.33 ≈ $479,733
