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On January 3, 2009, Michelson and 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 non interest bearing note requiring the company to pay the remaining $2,000,000 on December 31, 2010. 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.
March 30 $800,000
June 30 $1,200,000
July 30 $1,200,000
September $600,000
Michelson did not borrow specifically for the construction project, but did have the following debt outstanding through oput 2009:
$6,000,000, 8% long term note paynale
$2,000,000, 5% long term note payable
In December, the company purchased equipment and office furniture and fixtures for a lumpsum 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.) Determined the initial values of the various assets that Michelson acquired or constructed during 2009.
2.) How much interest expense will Michelson report in its 2009 income statement?
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