Question

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
Instructions:
Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building.The amount of interest $SHOW LIST OF ACCOUNTSPrepare 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 0 for the amounts.)Date Account Titles and Explanation Debit CreditDecember 31, 2020

Answer 1

Answer:

A. Avoidable interest cost= $183,000

B. Dr Building 183, 000

Dr Interest expense 857,000

Cr Cash 1,040,000

Explanation:

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

Expenditure 2020 Average investment

Mar-01 $ 360,000 *10//12= 300,000

Jun-01 $ 600,000* 7//12=350,000

Jul-01 $ 1,500,000 *6//12= 750,000

Dec-01 $ 1,500,000 *1//12= 125,000

Total Average investment $1,525,000

Loans Issued Actual interest cost

12% to finance construction $ 3,000,000 12/31/19 $360,000

(12%*3,000,000=360,000)

13% bond $ 4,000,000 years ago $ 520,000

(13%*4,000,000=520,000)

10% bond $ 1,600,000 years ago $ 160,000

(10%*1,600,000)

Total $1,040,000

Average investment = $1,525,000

Avoidable interest cost = $1,525,000* 12%

Avoidable interest cost= $183,000

B. Preparation of the journal entry to record the capitalization of interest and the recognition of interest expense

31/12/2020

Dr Building 183, 000

Dr Interest expense 857,000

(1,040,000-183,000)

Cr Cash 1,040,000