Determine the amount of interest to be capitalized in 2014 in relation to the co
ID: 2466997 • Letter: D
Question
Determine the amount of interest to be capitalized in 2014 in relation to the construction of the building.
AND
Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2014
On December 31, 2013, Main Inc. borrowed $6,300,000 at 13% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures related to this building: March 1, $756,000; June 1, $1,260,000; July 1, $3,150,000; December 1, $3,150,000. The building was completed in February 2015. Additional information is provided as follows.1. Other debt outstanding 10-year, 12% bond, December 31, 2007, interest payable annually $8,400,000 6-year, 11% note, dated December 31, 2011, interest payable annually $3,360,000 2. March 1, 2014, expenditure included land costs of $315,000 3. Interest revenue earned in 2014 $102,900
Explanation / Answer
Date
Expenditure
Months outstanding
Weights
Weighted expenditure
Mar-01
$ 756,000.00
10
0.8333
$ 630,000.00
Jun-01
$ 1,260,000.00
7
0.5833
$ 735,000.00
Jul-01
$ 3,150,000.00
6
0.5
$ 1,575,000.00
Dec-01
$ 3,150,000.00
1
0.0833
$ 262,500.00
$ 3,202,500.00
Avoidable interest = $3,202,500 * 13% = $416,325
Actual interest
Brorrowing for construction
($6,300,000 * 13%)
$ 819,000.00
Other debt outstanding
10-year, 12% bond, December 31, 2007, interest payable annually
($8,400,000 * 12%)
$ 1,008,000.00
6-year, 11% note, dated December 31, 2011, interest payable annually
($3,360,000 * 11%)
$ 369,600.00
$ 1,377,600.00
The amount of interest to be capitalized is the lesser of a) The avoidable interest and b) Actual interest paid. Since avoidable interest is less than actual interest, then capitalize amount of avoidable interest i.e. $416,325
The difference between the actual interest and avoidable interest is classified as Interest Expense.
b.
Buildings
$416,325
Interest expense
$961,275
Cash
$1,377,600
Date
Expenditure
Months outstanding
Weights
Weighted expenditure
Mar-01
$ 756,000.00
10
0.8333
$ 630,000.00
Jun-01
$ 1,260,000.00
7
0.5833
$ 735,000.00
Jul-01
$ 3,150,000.00
6
0.5
$ 1,575,000.00
Dec-01
$ 3,150,000.00
1
0.0833
$ 262,500.00
$ 3,202,500.00
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