Question

On December 31, 2019, Marigold Inc. borrowed $3,600,000 at 13% payable annually to finance the construction of a new building. In 2020, the company made the following expenditures related to this building: March 1, $432,000; June 1, $720,000; July 1, $1,800,000; December 1, $1,800,000. The building was completed in February 2021. Additional information is provided as follows. 1. Other debt outstanding 10-year, 14% bond, December 31, 2013, interest payable annually $4,800,000 6-year, 11% note, dated December 31, 2017, interest payable annually $1,920,000 2. March 1, 2020, expenditure included land costs of $180,000 3. Interest revenue earned in 2020 $58,800 Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building. The amount of interest ____________$ Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter for the amounts.) Debit Credit Date Account Titles and Explanation December 31, 2020

Answer 1

Answer:

Interest on borrowed = $237,900

Actual interest paid = $1,351,200

Explanation:

As per the data given in the question,

Marigold Inc. borrowed = $3,600,000 at 13 % payable annually

Expenditure related to the building :

March 1 = $432,000

June 1 = $720,000

July 1 = $1,800,000

December 1 = $1,800,000

As per the formula,

Weighted avg = (Amount × no. of months ) ÷ months in a year

            Amounts        no. of months     months in a year      weighted avg

Mar 1    $432,000            10                         12                        $360,000

June 1  $720,000             7                          12                        $420,000

July 1   $1,800,000           6                          12                        $900,000

Dec 1   $1,800,000           1                           12                        $150,000

Total weighted avg =                                                               $1,830,000

Interest on borrowed = $1,830,000 × 13%

= $237,900  

Actual interest paid :

$3,600,000 × 13% = $468,000

$4,800,000 × 14% = $672,000

$1,920,000 × 11% =$211,200

So, total Actual interest paid = $1,351,200