Inglewood Landscaping Corp. began constructing a new plant on December 1, 2014. On this date, the company purchased a parcel of land for $184,000 cash. In addition, it paid $2,000 in surveying costs and $4,000 for title transfer fees. An old dwelling on the premises was demolished at a cost of $3,000, with $1,000 being received from the sale of materials.
Architectural plans were also formalized on December 1, 20I4, when the architect was paid $30,000. The necessary building pennies costing $3,000 were obtained from the city and paid for on December 1 as well. The excavation work began during the first week in December and payments were made to the contractor as follows:
Date of Payment Amount of Payment
Mar. 1 ............... $240,000
May 1 ................ 360,000
July 1 ............... 60,000
The building was completed on July 1, 20I5.
To finance the plant construction, Inglewood borrowed $600,000 from a bank on December I, 20I4. Inglewood had no other borrowings. The $600,000 was a I 0-year loan bearing interest at I 0%.
Instructions
(a) Calculate the balance in each of the following accounts at December 3I, 20I4, and December 31, 20I5. Assume that Inglewood prepares financial statements in accordance with IFRS.
1.Land
2. Buildings
3. Interest Expense
(b) Identify what the effects would be on Inglewood's financial statements for the years ending December 31, 2014 and 2015, if its policy was to expense all borrowing costs as they are incurred.
(c) Discuss the financial statement effects of capitalization of borrowing costs. Contrast the financial statement effects of capitalizing borrowing costs against the financial statement effects of paying for the construction with internally generated funds.