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8 February, 08:59

On December 31, 2019, Main Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building. In 2020, the company made the following expenditures related to this building: March 1, $360,000; June 1, $600,000; July 1, $1,500,000; December 1, $1,500,000. The building was completed in February 2021. Additional information is provided as follows.

1. Other debt outstanding

10-year, 13% bond, December 31, 2013, interest payable annually $4,000,000

6-year, 10% note, dated December 31, 2017, interest payable annually $1,600,000

2. March 1, 2020, expenditure included land costs of $150,000

3. Interest revenue earned in 2020 $49,000

Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building.

Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2020.

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Answers (2)
  1. 8 February, 11:36
    0
    IAS 23 Borrowing Costs Adresses that an entity can capitalize borrowing costs from commencement date if it satisfies the following conditions:

    (a) it is incurring expenditures for the asset;

    (b) the company has incurred borrowing costs; and

    (c) Activities are undertaken to prepare the asset for ready to use or sale.

    The organization has met the condition one on March 1, 2019, which is borrowing $3000,000 for financing the construction of new building. The borrowing cost is:

    Borrowing cost = $3000,000*10% = $300,000

    Total cost incurred on the construction = $3,960,000

    This means the remaining ($960,000) was financed from the retained earnings because we can see there is interest income in the year 2020 of 49000. So the only cost that can be capitalized is $360,000.

    Journal Entry of Capitalizing borrowing Expenses:

    Dr Building 300,000

    Cr Interest Payable 300,000

    Remainder borrowing costs:

    4 Million

    Dr Interest Expense (4m*13%) 520,000

    Cr Interest Payable 520,000

    1.6 Million

    Dr Interest Expense (1.6m*10%) 160,000

    Cr Interest Payable 160,000

    Interest Income

    Dr Interest Income 49,000

    Cr Interest Receivable 49,000
  2. 8 February, 12:53
    0
    The Portion of the interest expense that Hurston Inc. will capitalizenin 2020 is $ 183,000

    Journal entry

    Dr. Building183,000

    Dr. Interest Expense 857,000

    Cr. Cash1,040,000

    Explanation:

    Expenditures, 2020 Average Investment

    March 1 360,000 10/12 300,000

    June 1600,000 7/12 350,000

    July 1 1,500,000 6/12 750,000

    Dec1 1,500,000 1/12 125,000

    Total 1,525,000

    Loans

    Issued: Actual Int Cost

    12% to finance

    construction3,000,000 12/31/2019 360,000

    13%Bond 4,000,000 Years ago 520,000

    10%Bond 1,600,000 Years ago 160,000 Total 1,040,000

    Average Inv Avoidable Int Cost

    1,525,000 12% 183,000

    Total 183,000

    The Portion of the interest expense that Hurston Inc. will capitalizenin 2020 is $ 183,000

    Journal entry

    Dr. Building183,000

    Dr. Interest Expense 857,000

    Cr. Cash 1,040,000

    Interest on land expenditure during construction is capitalized to the building cost which simply means the interest on land expenditure is not capitalized on land but the building.
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