Problem 4 Acme, Inc., a subsidiary of J & J, during 2015, began and completed a

Question

Problem 4
Acme, Inc., a subsidiary of J & J, during 2015, began and completed a small warehouse. Construction on the warehouse began January 2, of 2015. Expenditures were made as follows: January 2, $1,000,000, March 1, $900,000, July 1, $400,000 and Oct. 1, $800,000. J & J financed the project by issuing $1,000,000 in stock at the beginning of 2015 and borrowed $1,200,000 from The Last National Bank at an interest rate of 8%. In addition, Acme had the following debt: $1,000,000, interest rate of 9% borrowed in 2010, $2,000,000, 10% note borrowed in 2012.
Requirements:
a. Calculate the 2015 weighted average accumulated expenditures
b. How much is avoidable interest
c. How much is actual interest
d. Make the entry capitalizing the interest.

Note, interest is not paid on stock. Please show all your calculations. thanks.

Explanation / Answer

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1 Weighted average accumulated expenditure: Amount Months Weighted
Average
expenses Jan 2.Expenses 1000000 12 (1000000*12/12)=1000000 Mar 1.Expenses 900000 10 (900000*10/12)=750000 July 1.Expenses 400000 6 (400000*6/12)=200000 Oct 1.Expenses 800000 3 (800000*3/12)=200000 Total 2150000 Month is calculated from the date of expenditure incurred till Dec 31. 2 Avoidable interest Amount
of loan Interest % Avoidable
Interest 1 2 1*2 Specific debt 1200000 8% 96000 General debt 9% loan 1000000 9.67% 96700 10% note 2000000 9.67% 193400 (Note:1) Total avoidable interest 386100 Weighted average interest rate for general debt: Amount
of loan Interest % Interest 9% loan 1000000 9% 90000 10% note 2000000 10% 200000 3000000 290000 Weighted average interest rate=Total interest expenses/Total amount of loan=290000/3000000=0.0967=9.67% 3 Actual interest: Amount
of loan Interest % Avoidable
Interest 1 2 1*2 Specific debt 1200000 8% 96000 General debt 9% loan 1000000 9.00% 90000 10% note 2000000 10.00% 200000 Total actual interest 386000 4 Journal entry Date Account tilts and explanation Debit Credit Dec 31. Construction in progress-Warehouse 290000 Interest payable 290000 (Capitalizing interest)

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