On December 31, 2016, Shamrock Inc. borrowed $3,780,000 at 13% payable annually

Question

On December 31, 2016, Shamrock Inc. borrowed $3,780,000 at 13% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $453,600; June 1, $756,000; July 1, $1,890,000; December 1, $1,890,000. The building was completed in February 2018. Additional information is provided as follows.

Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

There is 3 total journal entries...

1. Other debt outstanding 10-year, 14% bond, December 31, 2010, interest payable annually $5,040,000 6-year, 11% note, dated December 31, 2014, interest payable annually $2,016,000 2. March 1, 2017, expenditure included land costs of $189,000 3. Interest revenue earned in 2017 $61,740 Exercise 10-8 (Part Level Submission) On December 31, 2016, Shamrock Inc. borrowed $3,780,000 at 13% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $453,600; June 1, $756,000; July 1, $1,890,000; December 1, $1,890,000. The building was completed in February 2018. Additional information is provided as follows. 1. Other debt outstanding 10-year, 14% bond, December 31, 2010, interest payable annually 6-year, 11% note, dated December 31, 2014, interest payable annually $5,040,000 $2,016,000 2. March 1, 2017, expenditure included land costs of $189,000 3. Interest revenue earned in 2017 $61,740

Explanation / Answer

Capitalisation of Interest at December 31, 2017

March 1, ($453,600-189000)*13/100*10/12= $28665

We have to substract the cost of land.

June 1, $756,000*13/100*7/12= $57330

July 1, $1,890,000*13/100*6*12= $122850

December 1, $1,890,000*13/100*1/12= $20475

Total Interest to be capitalised= $229320

Building A/c Dr. $167580 ($229320-$61740)

To Bank $167580 (Interest earned from the surplus funds needs to be set off from the interest paid)

Interest needs to be expenses out at 31st December 2017

$5040000*14/100= $705600

$2016000*11/100= $221760

Interest A/c Dr. $927360(221760+705600)

To Bank $927360

Journal Entry for Purchase of land

Land A/c Dr. $189000

To Bank $189000

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