Question

Exercise 11-11 Capitalizing interest (LO 11-2) Kobe Company began constructing a building for its own use in February 20X1. During 20X1, Kobe incurred interest of $70,000 on specific construction debt and $15,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was $60,000. Required: 1a. What amount of interest should Kobe capitalize? 1b. Prepare the journal entry to record payment of the interest. 2. If interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was instead $90,000, what amount of interest should Kobe capitalize?

Answer 1

Kobe should capitalize the lower amount of interest incurred, either on specific construction debt or other borrowings, and record the payment of interest through a journal entry. The amount of interest to be capitalized is limited to the lower of the actual interest incurred or the interest computed on the weighted-average amount of accumulated expenditures.

Step-by-step explanation:

1a. To determine the amount of interest that Kobe should capitalize, we need to consider two types of interest: interest on specific construction debt and interest on other borrowings. Kobe should capitalize the lower of the two amounts. In this case, the lower amount is $60,000, which is the interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1.

1b. To record the payment of the interest, Kobe will debit Interest Expense for $60,000 and credit Cash for $60,000.

2. If the interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 is $90,000, Kobe should still capitalize only $60,000. The amount of interest that can be capitalized is limited to the lower of the actual interest incurred or the interest computed on the weighted-average amount of accumulated expenditures.

Answer 2

1a. To determine the amount of interest that Kobe should capitalize, we need to compare the actual interest incurred on the specific construction debt ($70,000) to the amount of interest that could have been avoided if the expenditures had not been made ($60,000). The excess of actual interest over avoidable interest is the amount that should be capitalized.

Excess interest = Actual interest - Avoidable interest
Excess interest = $70,000 - $60,000
Excess interest = $10,000

Therefore, Kobe should capitalize $10,000 of interest.

1b. The journal entry to record the payment of the interest would be:

Interest Expense $85,000
Cash $85,000

($70,000 + $15,000 = $85,000)

2. If interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was $90,000, the calculation for the amount of interest that should be capitalized would be:

Excess interest = Actual interest - Avoidable interest
Excess interest = $70,000 - $90,000
Excess interest = ($20,000)

Since the avoidable interest ($90,000) is greater than the actual interest incurred on the specific construction debt ($70,000), Kobe would not capitalize any interest.