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ID: 2450601 • Letter: W

Question

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Date

Account Titles and Explanation

Debit

Credit

7/31

(To record the note.)

(To record the payment to Minsk.)

11/1

(To record the proceeds from the investment.)

(To record the payment to Minsk.)

12/31

On July 31, 2014, Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2014. To help finance construction, on July 31 Amsterdam issued a $452,400, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $341,400 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, Amsterdam made a final $111,000 payment to Minsk. Other than the note to Netherlands, Amsterdam’s only outstanding liability at December 31, 2014, is a $37,100, 8%, 6-year note payable, dated January 1, 2011, on which interest is payable each December 31.

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Explanation / Answer

Date      Expenditure               Capital period             = WAAE

7/31       $341,400                   3/12                             = 85,350

11/1     $111,000                   0                                  = 0____

                                                                                    $85,350

                       Avoidable Interest @ X 12%                $10,242

Actual Interest

Const.              $$452,400 x 12% x 5/12                     22,620

Other              $37,100 x 8% x 1                                 2,968

                                                                                    25,588

                                                                                    ======

Date

Account Titles and Explanation

Debit

Credit

7/31

Cash

452,400

          Note Payable

452,400

(To record the note.)

Machinery

341,400

Trading Securities

111,000

           Cash

452,400

(To record the payment to Minsk.)

11/1

Cash

113,775

                 Trading Securities

111,000

                  Interest revenue ($111,000 x 10% x 3/12)

2,775

(To record the proceeds from the investment.)

Machine

111,000

                Cash

111,000

(To record the payment to Minsk.)

12/31

Interest Expense   ($37,100 x 8%)

2,968

         Cash

2,968

(To record interest payment on note payable of $37,100)

Date

Account Titles and Explanation

Debit

Credit

7/31

Cash

452,400

          Note Payable

452,400

(To record the note.)

Machinery

341,400

Trading Securities

111,000

           Cash

452,400

(To record the payment to Minsk.)

11/1

Cash

113,775

                 Trading Securities

111,000

                  Interest revenue ($111,000 x 10% x 3/12)

2,775

(To record the proceeds from the investment.)

Machine

111,000

                Cash

111,000

(To record the payment to Minsk.)

12/31

Interest Expense   ($37,100 x 8%)

2,968

         Cash

2,968

(To record interest payment on note payable of $37,100)