On January 3, 2018, Michelson & Sons Acquired a Tract

question 22

Essay

On January 3, 2018, Michelson & Sons acquired a tract of land just outside the city limits. The land and existing building were purchased for $2.4 million. Michelson paid $400,000 and signed a noninterest-bearing note requiring the company to pay the remaining $2,000,000 on December 31, 2019. An interest rate of 7% properly reflects the time value of money for this type of loan agreement. Transfer taxes, title insurance, and other costs totaling $24,000 were paid at closing.
During February, the old building was demolished at a cost of $120,000, and an additional $100,000 was paid to clear and grade the land. Construction of a new building began on March 1 and was completed on October 30. Construction expenditures were as follows:
$$\begin{array} { l r } \text { March 30 } & \$ 800,000 \\\text { June 30 } & 1,200,000 \\\text { July 30 } & 1,200,000 \\\text { September 1 } & 600,000\end{array}$$
Michelson did not borrow specifically for the construction project, but did have the following debt outstanding throughout 2018:

$6,000,000, 8% long-term note payable
$2,000,000, 5% long-term note payable

In December, the company purchased equipment and office furniture and fixtures for a lump-sum price of $800,000. The fair values of the equipment and the furniture and fixtures were $540,000 and $360,000, respectively. In December, Michelson paid $340,000 for the construction of parking lots and landscaping.

Required:
1. Determine the initial values of the various assets that Michelson acquired or constructed during 2018.
2. How much interest expense will Michelson report in its 2018 income statement?

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Definitions:

Kinesthetic Sense

The sense through which one perceives the position and movement of their body, including limbs, muscles, and joints, without using sight.

Forefinger

The first finger or the finger next to the thumb, also known as the index finger, used for pointing or indicating.

Size Constancy

A perceptual mechanism that allows the brain to perceive objects as having a constant size, despite changes in distance or the size of the image on the retina.

Physical Dimensions

Measurements or aspects of objects and spaces, such as length, width, height, and volume.