On December 31, 2013, Main Inc. borrowed $6,540,000 at 13% payable annually to f

Question

On December 31, 2013, Main Inc. borrowed $6,540,000 at 13% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures related to this building: March 1, $784,800; June 1, $1,308,000; July 1, $3,270,000; December 1, $3,270,000. The building was completed in February 2015. Additional information is provided as follows.

10-year, 12% bond, December 31, 2007, interest payable annually$8,720,0006-year, 11% note, dated December 31, 2011, interest payable annually$3,488,000

2.March 1, 2014, expenditure included land costs of $327,000

3.Interest revenue earned in 2014$106,820

Determine the amount of interest to be capitalized in 2014 in relation to the construction of the building. (Round answer to 0 decimal places, e.g. 5,275.)

Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2014. (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.)

1.Other debt outstanding

Explanation / Answer

Journal Entry

Working Note

Avoidable Interest Calculation Date Expenditure Months Amount outstanding full year March, 1 2014 784800 10 784800*10/12 654000 June, 1 2014 1308000 7 1308000*7/12 763000 July, 1 2014 3270000 6 3270000*6/12 1635000 December, 1 2014 3270000 1 3270000*1/12 272500 Total 8632800 3324500 Avoidable Interest Accumulated Expenditure 3324500 Interest Rate : Construction Loan 13% Avoidable Interest 432185 Actual Interest Calculation Particulars Amount Interest Rate Calculation Interest Construction Note 6540000 13% 6540000*13%*12/12 850200 10 Year Bond 8720000 12% 8720000*12%*12/12 1046400 6 Year Note 3488000 11% 3488000*11%*12/12 383680 Total Actual Interest during the year 2280280 Lower ofAvoidable Interest or actual interest Lower of432185 or 2280280 432185 Interest to be capitalized Lower Interest to be Capitalized 432185

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