On january 3, 2014, 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, 2015. 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::

Michelson did not borrow specifically for the construction project, but did have the following debt outstanding throughout 2009:

$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.

Use the chart below to determine the following:

1. Determine the initial values of the various assets that Michelson acquired or constructed during the year.
2. How much interest expense will Michelson report for the year on their income statement?

Item

Land

Land improvements

Building

Equipment

Furniture and fixtures

1

Expert Answer