On December 31, 2013, Main Inc. borrowed $4,590,000 at 12% payable annually to f

Question

On December 31, 2013, Main Inc. borrowed $4,590,000 at 12% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures related to this building: March 1, $550,800; June 1, $918,000; July 1, $2,295,000; December 1, $2,295,000. The building was completed in February 2015. Additional information is provided as follows.

1. Other debt outstanding 10-year, 11% bond, December 31, 2007, interest payable annually $6,120,000 6-year, 10% note, dated December 31, 2011, interest payable annually $2,448,000

2. March 1, 2014, expenditure included land costs of $229,500

3. Interest revenue earned in 2014 $74,970

(A) Determine the amount of interest to be capitalized in 2014 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, 2012. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)

Explanation / Answer

Expenditure on Building in 2014 Amount 01.03.2014* $321,300 01.06.2014 $918,000 01.07.2014 $2,295,000 01.12.2014 $2,295,000 TotaL Expenditure $5,829,300 *Expenditure incurred on 01.03.2014 on Land Cost $ 229500 is deducted from Building Cost Amount Annual Annual Interest Rate Interest Cost Specific Borrowing $4,590,000 12% 550800 11% Bond $6,120,000 11% 673200 10% Note $2,448,000 10% 244800 Total $8,568,000 10.71% $918,000 Weighted Average Interest rate = 918000 / 8568000 X 100 = 10.71% Calculation of Interest Cost to be capitalized 2014 Calculation of Accumulated Expenditure 01.03.2014 $321,300 321300 X 9/12 240,975 01.06.2014 $918,000 918000 x 7/12 535500 01.07.2014 $2,295,000 2295000 x 6/12 1147500 01.12.2014 $2,295,000 2295000 x 1/12 191250 Total average Accumulated Exp. 2,115,225 Interest Cost to be capitalized - $2115225 X 12% 253827 Answer b) Journal entry in the Year 2012 No Interest is Capitalized in the year 2012 as building construction started in Year 2014 Interest A/c                                         Dr. 673200       To Interest Payable A/c 673200 (Interest of 10 year 11% Bond recorded) Interest A/c                                         Dr. 244800       To Interest Payable A/c 244800 (Interest of 6 year 10% Note recorded) Interest Payable A/c                        Dr. 918000 To Bank A/c / Cash A/c 918000 (Interest paid on 11% Bond and 10% Note)

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