Answer:
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 <u>$1,500,000 </u> 1 1/12 x 1,500,000=<u> 125.000</u>
Accumulated $3,960,000
Expenditure
before interest
<u>Weighted Average Accumulated Expenditure =$1,525,000</u>
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
