On December 31, 2009, Hurston Inc. borrowed $3,000,000 at 12% payable annually t

Question

On December 31, 2009, Hurston Inc. borrowed $3,000,000 at 12%
payable annually to finance the construction of a new building. In 2010, the company made the following
expenditures related to this building: March 1, $360,000; June 1, $600,000; July 1, $1,500,000; December
1, $1,200,000. Additional information is provided as follows.
1. Other debt outstanding
10-year, 11% bond, December 31, 2003, interest payable annually $1,000,000
6-year, 10% note, dated December 31, 2007, interest payable annually $1,600,000
2. March 1, 2010, expenditure included land costs of $150,000
3. Interest revenue earned in 2010 $49,000
Instructions
(a) Determine the amount of interest to be capitalized in 2010 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, 2010.

Explanation / Answer

The amount of interest to be capitalized in 2010 in relation to the construction of the
building.

(b) the journal entry to record the capitalization of interest and the recognition of interest expense at December 31, 2010

working note

Lower ofAvoidable Interest or actual interest Avoidable Interest Calculation Date Expenditure Months Amount outstanding full year March, 1 2010 360000 10 360000*10/12 300000 June, 1 2010 600000 7 600000*7/12 350000 July, 1 2010 1500000 6 1500000*6/12 750000 December, 1 2010 1200000 1 1200000*1/12 100000 Total 3660000 1500000 Avoidable Interest Accumulated Expenditure 1500000 Interest Rate : Construction Loan 12% Avoidable Interest 180000 Actual Interest Calculation Particulars Amount Interest Rate Calculation Interest Construction Note 3000000 12% 3000000*12%*12/12 360000 10 Year Bond 1000000 11% 1000000*11%*12/12 110000 6 Year Note 1600000 10% 1600000*10%*12/12 160000 Total Actual Interest during the year 630000 Lower ofAvoidable Interest or actual interest Lower of 180000 or 630000 180000 Interest to be capitalized Lower Interest to be Capitalized 180000

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