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29 January, 00:00

On December 31, 2013, Main Inc borrowed $3,000,000 at 12% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures related to this building: March 1 $360,000; June 1, $600,00, July 1 $1,500,000; December 1, $1,500,00. The building was completed in February 2015. Additional information is provided as follows. 1) Other debt outstanding

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

6-year, 10% note, dated December 31, 2011, interest payable annually $1,600,000

2) March 1, 2014, expenditure included land cost of $150,000

3) Interest revenue earned in 2014 $ 49,000

Instructions;

a) Determine the amount of interest to be capitalized in 2014 in relation to the construction of the building.

b) Prepare the journal entry to record the capitalization of interest and recognition of interest expense, if any, at December31, 2014.

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Answers (1)
  1. 29 January, 02:34
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    a) Interest to be capitalized = $183,000

    b) The journal entry is in the explanations.

    Explanation:

    Calculation of the interest to be capitalized in 2014 for construction of the building:

    Capitalized Interest = Annual interest rate x Weighted Average Accumulated Expenditure

    = (12/100) x $1,525,000 = $183,000

    How did we calculate the Weighted Average Accumulated Expenditure for 2014

    Particulars Expenditure Months Weighed Amounts

    March 1 $360,000 10 10/12 x 360,000 = 300,000

    June 1 $600,000 7 7/12 x 600,000 = 350,000

    July 1 $1,500,000 6 6/12 x 1,500,000 = 750,000

    December 1 $1,500,000 1 1/12 x 1,500,000 = 125.000

    Accumulated $3,960,000

    Expenditure

    before interest

    Weighted Average Accumulated Expenditure = $1,525,000

    B). Journal entry to record the capitalization of the interest as well as its recognition as at December 31st, 2014.

    Date Particulars Debit Credit

    December 31 Building (Interest) $183,000

    Interest Expenses $857,000

    Interest Payable $1,040,000

    Being the recording of the capitalization of the interest

    How did we calculate the interest?

    Calculation of the net interest expense for 2014

    Particular Amount

    $3,000,000 x 12% 360,000

    $4000,000 x 13% 520,000

    $1,600,000 x 10% 160,000

    Total Expense Expense $1,040,000

    Less: Interest to be capitalized $183,000

    The Net Interest Expense $857,000
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