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On January 3, 2018, HDR Company acquired a tract of land just outside the city limits. The land and existing building were purchased for $2.4 million. HDR Company 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:

March 30 $ 800,000

June 30 1,200,000

July 30 1,200,000

September 1 600,000

HDR Company 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. (Hint: the assets mentioned are listed below: )

Land

Land Improvements

Equipment

Furniture and Fixtures

2.How much interest expense will Michelson report in its 2018 income statement?

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