P10-5 Classification of Costs and Interest Capitalization
On January 1, 2012, 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, 2012, for the construction of an office building on land site number 101. The building was completed and occupied on September 31, 2013. Additional construction costs were incurred as follows.
Plans, specifications, and blueprints 21,000
Architect's 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, 2012. The loan is payable in 10 annual installments of $300,000 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, 2012 1,300,000
For the period January 1 to September 30, 2013 1,900,000
1. Prepare a schedule that discloses that individual costs making up the balance in the land account in respect of land site number 101 as of September 30, 2013.
2. Prepare a schedule that discloses the individual costs that should be capitalized in the office building account as of September 30, 2013. Show supporting computations in good form.