Scenario - Riders Corporation manufactures bicycles. To meet the increased demand for its bicycles recently it acquired land and equipment and entered into a contract with a construction company to construct a new factory. Below are the details of expenses Riders incurred in 2016 in acquiring land and equipment and with regard to construction of factory.
Purchase price of the land $ 850,000
Demolition and removal of old building 35,000
Clearing and grading the land before construction 110,000
Various closing costs in connection with acquiring the land 10,000
Architect's fee 12,500
Payments to contractor for building construction 1,850,000
Equipment purchased 575,000
Freight charges on equipment 24,000
Trees, plants and other landscaping 30,000
Installation of a sprinkler system for the landscaping 4,000
Cost to build special platforms and install wiring for the equipment 9,000
Cost of trial runs to ensure proper installation of the Equipment 5,000
Fire and theft insurance on the factory for the first year of use 18,000
Construction of building started on March 2016 and completed on December 2017. Riders Corporation had only one interest bearing long-term debt with a book value of $7,500,000 and an effective interest rate of 6%. Payment of $1,850,000 to contractor is made in several installments as shown below.
March 1, 2016
$400,000
July 31,2016
450,000
September 30, 2016
350,000
November 30, 2016
450,000
December 31, 2016
200,000
Requirements
1. Explain the accounting treatment for each item of expenditure listed above.
2. Determine the initial valuation of each of the assets Riders Corporation acquired in the above transactions.