Exercise 10-9 (Part Level Submission) On July 31, 2017, Waterway Company engaged
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Exercise 10-9 (Part Level Submission) On July 31, 2017, Waterway Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2017, To help finance construction, on July 31 waterway issued a $301,200, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $195,200 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, waterway made a final $106,000 payment to Minsk. Other than the note to Netherlands, waterway's only outstanding liability at December 31 2017, is a $30 300 8% 6-year note payable date anuary 201, on which terest s able each December 31 ? (a) Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2017. Interest revenue Weighted-average accumulated expenditures Avoidable interest Interest capitalizedExplanation / Answer
a) Interest Revenue on trading securities for 3 months = $106,000*10%*3/12 = $2,650
b) Weighted Average Accumulated Expenditure = ($195,200*3/12)+($106,000*0/12)
= $48,800+$0 = $48,800
c) Avoidable Interest for 2017 = Weighted Average Accumulated Exp.*Interest Rate
= $48,800*12% = $5,856
d) Total actual interest on 3-year note payable for 2017 = $301,200*12%*5/12 (from August to December)
= $15,060
Interest to be expensed for 3-year Note = Actual Interest - Avoidable Interest
= $15,060 - $5,856 = $9,204
Interest to be expensed for 6-year Note = $30,300*8% = $2,424
Total Interest to be expensed for 2017 = $9,204+$2,424 = $11,628
Interest to be capitalized = $5,856
(As the total amount of expenditure is $301,200 which is from 3-year note payable, only rate of interest for this 3-year note payable will be considered for calculating avoidable interest).
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