Question

Exercise 10-8 On December 31, 2016, Ivanhoe Inc. borrowed $3,240,000 at 13% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $388,800; June 1, $648,000; July 1, $1,620,000; December 1, $1,620,000. The building was completed in February 2018. Additional information is provided as follows. 1. Other debt outstanding 10-year, 14% bond, December 31, 2010, interest payable annually $4,320,000 6-year, 11% note, dated December 31, 2014, interest payable annually $1,728,000 2. March 1, 2017, expenditure included land costs of $162,000 3. Interest revenue earned in 2017 $52,920 Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building. The amount of interest $ Show List of Accounts Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2017. (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 Credit December 31, 2017

Answer 1

Answer:

avoidable interest (capitalized through building account) $215,642.09

Explanation:

capitalization of construction cost:

Date      outlay             weight           subtotal

March 1     388,800.00   0.83   324,000.00  

June 1     648,000.00   0.58   378,000.00  

July 1  1,620,000.00   0.50   810,000.00  

Dec 1  1,620,000.00   0.08   135,000.00  

Total Capitalization      1,647,000.00  

We multiply the expenditures by the time exposed to interest

(from the date they are incurred until year end)

Then, we add them to  know the total amount to capitalize

Now, we calcualte the average rate:

Debt outstanding   rate        interest  

3,240,000        0.13      421200

4,320,000        0.14     604800

1,728,000         0.11      190080

9288000               1216080

the average interest will be the division between the interest and the total debt outstanding:

1,216,080 / 9,288,000 = 0.130930233

Finally we calculate the avoidable interest:

Capitalization x average rate: 215,642.093