Question

Blue Landscaping began construction of a new plant on December 1, 2017. On this date, the company purchased a parcel of land for $150,000 in cash. In addition, it paid $2,400 in surveying costs and $3,840 for a title insurance policy. An old dwelling on the premises was demolished at a cost of $3,360, with $1,200 being received from the sale of materials.
Architectural plans were also formalized on December 1, 2017, when the architect was paid $36,000. The necessary building permits costing $3,360 were obtained from the city and paid for on December 1 as well. The excavation work began during the first week in December with payments made to the contractor in 2018 as follows.

Date of Payment Amount of Payment
March 1 $ 262,800
May 1 333,600
July 1 63,600
The building was completed on July 1, 2018.

To finance construction of this plant, Blue borrowed $603,600 from the bank on December 1, 2017. Blue had no other borrowings. The $603,600 was a 10-year loan bearing interest at 10%.

Compute the balance in each of the following accounts at December 31, 2017, and December 31, 2018. (Round answers to 0 decimal places, e.g. 5,275.)

December 31, 2017 December 31, 2018
(a) Balance in Land Account
(b) Balance in Building
(c) Balance in Interest Expense

Answer 1

Answer:

Blue Landscaping: Computation of

Balance in Land Account:

i) on December 31, 2017:

Land = $150,000

Surveying costs = $2,400

Title Insurance = $3,840

Demolition cost = $3,360

Less Sale of Materials = $1,200

a) Balance in Land = $160,800

b) Balance in Building = $39,360 made up of:

Architectural Plans = $36,000

Building Permits = $3,360

c) Balance in  Interest Expense = $5,030, calculated as follows:

$603,600 x 10% x 1/12 = $5,030

ii) on December 1, 2018:

a) Balance in Land = $160,800

b) Balance in Building:

Beginning Balance = $39,360

Contractor payments = $660,000 $( 262,800 + 333,600 + 63,600)

Total = $699,360

c) Interest Expense:

Beginning Balance = $5,030

2018 Interest = $60,360, calculated as follows: $603,600 x 10% x = $60,360

Total = $65,390

Explanation:

a) All the costs incurred necessarily in the acquisition of the land and to make it useable have to be included.  Title Insurance is an insurance policy for past transactions and not for the future.  It is therefore justifiable to include it like other incidental costs.  The sales proceed from materials of the old building reduces the cost of the land.

b) Interest on Loan for December 31, 2017 was accrued for one month only.  This is in line with the accruals concept of accounting.  It was a finance cost used to create a capital asset that would generate future income.  It is not capitalized but expensed in the period in which it was incurred.