Date Account Titles and Explanation Debit Credit On December 31, 2013, Main Inc.
ID: 2477747 • Letter: D
Question
Date
Account Titles and Explanation
Debit
Credit
On December 31, 2013, Main Inc. borrowed $4,170,000 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, $500,400; June 1, $834,000; July 1, $2,085,000; December 1, $2,085,000. The building was completed in February 2015. Additional information is provided as follows.1. Other debt outstanding 10-year, 12% bond, December 31, 2007, interest payable annually $5,560,000 6-year, 11% note, dated December 31, 2011, interest payable annually $2,224,000 2. March 1, 2014, expenditure included land costs of $208,500 3. Interest revenue earned in 2014 $68,110
Explanation / Answer
Answer 1 Total construction cost incurred for new building in 2014 = (500400-208500) + 834000 + 2085000 + 2085000 = $52,95,900 It means that the entire loan proceeds of $41,70,000 were used in 2014 Assume that the balance funds used for construction are from internal source hence bear no interest. Hence Interest expense to be capitalised during 2014 in relation to construction of new building is as under Interest to be capitalised = $41,70,000 * 13% = $5,42,100 Answer 2 Journal entries Date Account title & explanation Debit Credit December 31, 2014 Capital work in process - Building 4,73,990 Interest earned 68,110 Interest on New Loan payable 5,42,100 (Interest on loan taken for construction on new building capitalised less interest earned on loan funds investments) December 31, 2014 Interest Expense 911840 Interest on bond payable 667200 Interest on Note payable 244640 (Interest expense recognised for the period)
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