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

a) Interest to be capitalized = $183,000

b) The journal entry is in the explanations.

Step-by-step 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