Question

On December 31, 2019, Splish Inc. borrowed $4,320,000 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, $518,400; June 1, $864,000; July 1, $2,160,000; December 1, $2,160,000. 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 $5,760,000
6-year, 11% note, dated December 31, 2017, interest payable annually $2,304,000
2. March 1, 2020, expenditure included land costs of $216,000
3. Interest revenue earned in 2020 $70,560
A. Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building.
B. Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2020.

Answer 1

Answer:

$285,480

Explanation:

The amount of interest to be capitalized in 2020 in relation to the construction of the building can be calculated as follows.

Date Amount          Time    Weighted Average expenditure

Mar-01 $518,400 10-Dec               432,000

Jun-01 $864,000 07-Dec               504,000

Jul-01 $2,160,000 06-Dec             1,080,000

Dec-01 $2,160,000 01-Dec               180,000

                                                                    2,196,000

Amount of interest  = $2,196,000 x 13%

Amount of interest = $285,480

Actual Interest Paid  

$4,320,000 x 13% = $561,600  

$5,760,000 x 14% = $806,400  

$2,304,000 x 11% = $253,440  

                                  $1,621,440

Journal Entry 31-12-2020

Dr Building                                                 $285,480  

Dr Interest Expense.                                  $1,335,960  

Cr Cash                                                     $1,621,440