| Problem 10-7 - Please Show Work Sandhill Inc. is a book distributor that had been operating in its original facility since 1990. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Sandhill since 2015. Sandhill original facility became obsolete by early 2020 because of the increased sales volume and the fact that Sandhill now carries CDs in addition to books. On June 1, 2020, Sandhill contracted with Black Construction to have a new building constructed for $5,360,000 on land owned by Sandhill. The payments made by Sandhill to Black Construction are shown in the schedule below. | Date | | Amount | | July 30, 2020 | | $1,206,000 | | January 30, 2021 | | 2,010,000 | | May 30, 2021 | | 2,144,000 | | Total payments | | $5,360,000 | Construction was completed and the building was ready for occupancy on May 27, 2021. Sandhill had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2021, the end of its fiscal year. | 10%, 5-year note payable of $2,680,000, dated April 1, 2017, with interest payable annually on April 1. | | 12%, 10-year bond issue of $4,020,000 sold at par on June 30, 2013, with interest payable annually on June 30. | The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material. |
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