Question

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.

Answer 1

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             $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