On December 31, 2016, Flint Inc. borrowed $3,540,000 at 13% payable annually to
ID: 2535581 • Letter: O
Question
On December 31, 2016, Flint Inc. borrowed $3,540,000 at 13% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $424,800; June 1, $708,000; July 1, $1,770,000; December 1, $1,770,000. The building was completed in February 2018. Additional information is provided as follows.
$57,820
Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building.
Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2017. (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.)
December 31, 2017
Buildings
Interest Expense
Cash
1. Other debt outstanding 10-year, 14% bond, December 31, 2010, interest payable annually $4,720,000 6-year, 11% note, dated December 31, 2014, interest payable annually $1,888,000 2. March 1, 2017, expenditure included land costs of $177,000 3. Interest revenue earned in 2017$57,820
Explanation / Answer
Requirement 1 Determination of weighted average Expenditures Date of Expenditure Amount of expenditure Weight Factor Weighted average expenditure 2017 Mar-01 424800 10/12 106200 Jun-01 708000 7/12 413000 Jul-01 1770000 6/12 885000 Dec-01 1770000 1/12 147500 Total 4672800 Weighted average accumulated expenditure 1551700 Requirement 2 Actual Interest Debt Interest Actual Interest Specific Borrowing 3540000 13% 460200 General Borrowing 4720000 14% 660800 General Borrowing 1888000 11% 207680 Total 10148000 1328680 Requirement 2 Avoidable Interest Weighted average interest for other debt 13.14 Debt Interest rate Interest Amount 4720000 14% 660800 1888000 11% 207680 6608000 13.14285714 868480 Avoidable Interest Weighted average expenditure Interest rate Avoidable interest Specific borrowing 1551700 13% 201721 Other debt 0 13.14% 0 Total 201721 Since avoidable interest is less thatn actual interest of $1328680, the avoidable interest of $201721 will be capitalized. Date General Journal Debit Credit December 31, 2017 Buildings 201721 Interest expense 1126959 Cash 1328680
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