Early in its fiscal year ending December 31, 2014, CYZ Apparel Co. finalized plans to expand operations. The first stage was completed on February 28 with the purchase of a tract of land on the outskirts of the city. CYZ paid $200,000 and signed a noninterest-bearing note requiring the company to pay $600,000 on February 28, 2016. An interest rate of 7% properly reflects the time value of money for this type of loan agreement. Title search, insurance, and other closing costs totaling $20,000 were paid at closing.
During March, the old building was demolished at a cost of $65,000, and an additional $40,000 was paid to clear and grade the land. Construction of a new building began on June 1 and was completed on November 30. Construction expenditures were as follows:
June 1 August 1 September 1 October 1
$1,100,000 1,300,000 1,500,000
900,000
CYZ borrowed $4,000,000 at 7% on May 1 to help finance construction. This loan, plus interest, will be paid in 2015. The company also had the following debt outstanding throughout 2014:
$4,000,000, 8% long-term note payable $2,500,000, 7.5% long-term bonds payable.
In November, the company purchased 12 identical pieces of equipment and office furniture for a lump- sum price of $650,000. The fair values of the equipment and the furniture were $455,000 and $245,000, respectively. In December, CYZ paid a contractor $300,000 for the construction of parking lots and for landscaping.
Determine the initial values of the land, land improvements, building, equipment, and furniture that CYZ acquired or constructed during 2014. The company uses the specific interest method to determine the amount of interest capitalized on the building construction.
2. How much interest expense will CYZ report in its 2014 income statement?
