Question

On July 31, 2020, Novak Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction begun immediately and was completed on November 1, 2020. To help finance construction, on July 31 Novak issued a $326,400, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $217,400 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Novak made a final $109,000 payment to Minsk. Other than the note to the Netherlands, Novak’s only outstanding liability at December 31, 2020, is a $31,400, 8%, 6-year note payable, dated January 1, 2017, on which interest is payable each December 31.

Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2020.

Answer 1

weighted expenditures 54,350

avoidable interest 6,522

capitalized interest 6,522

interest revenue 2,725

Total Interest expense 12,310‬

Step-by-step explanation:

217,400 paid to Misk and capitalized until Nov 1st:

August, September, October: 3 months

217,400 x 3/12 = 54,350 weighted expenditures

We apply to this the specific borrowing rate:

54,350 x 12% = 6,522

Interest revenue

amount invested: 326,400 - 217,400 = 109,000

at 10% for a period of 3 month:

109,000 x 10% x 3/12 = 2,725

Interest expense:

326,400 x 12% x 5/12 = 16,320

31,400 x 8% x full-year = 2,512

avoidable interest (6,522)

Total Interest expense 12,310‬