Edith Industries constructed a building during the current year. The building wa
ID: 2459846 • Letter: E
Question
Edith Industries constructed a building during the current year. The building was constructed on land that was purchased on January 1 at a cost of $200,000. Edith immediately began preparing the land for construction by clearing it. Construction of the building began on January 2 and was completed on December 31. The payments to the building contractor were as follows:
Date
Payment
February 1
$600,000
June 30
450,000
September 1
450,000
November 1
300,000
December 31
100,000
To finance construction of the building, Edith Company took out a $1,000,000, 9% construction loan on January 1. Edith repaid the loan in full, including all interest, on December 31. Edith had $500,000 of other outstanding long-term debt during the year at a borrowing rate of 8%.
Required:
Determine the Weighted Average Accumulated Expenditures (WAAE) during the year.
Determine the actual interest incurred during the year.
Determine the avoidable interest. How much interest can be capitalized?
Record all journal entries related to the acquisition of this asset. Include the journal entries related to the construction loan, as well as the adjusting entry to recognize interest expense for the year.
What is the balance in the Land account at the end of the year? What is the total balance in the Building account? How much is Interest Expense for the year?
Date
Payment
February 1
$600,000
June 30
450,000
September 1
450,000
November 1
300,000
December 31
100,000
Explanation / Answer
Answer:
Weighted-average accumulated expenditures = expenditure incurred * months in capitalization period of the relevant year/12
Weighted Average Accumulated Expenditures (WAAE) = $1,133,333
Actual interest incurred during the year:
Avoidable Interest :-
Avoidable interest is $ 100,667 and it can be capitalized.
Balance in Land account = $ 200,000
Balance in building account =$ 2,000,667
Interest Expense during the year = $ 29,333
Date (a) Payment (b)Month till Dec ( c) = (a) *(b)/ 12 Jan-01 200,000 12 200,000 Feb-01 600,000 10 500,000 Jun-30 450,000 6 225,000 Sep-01 450,000 4 150,000 Nov-01 300,000 2 50,000 Dec-31 100,000 1 8,333 Total 1,133,333Related Questions
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