On December 31, 2016, Marin Inc. borrowed $4,440,000 at 13% payable annually to

Question

On December 31, 2016, Marin Inc. borrowed $4,440,000 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, $532,800; June 1, $888,000; July 1, $2,220,000; December 1, $2,220,000. The building was completed in February 2018. Additional information is provided as follows.
1. Other debt outstanding 10-year, 14% bond, December 31, 2010, interest payable annually $5,920,000 6-year, 11% note, dated December 31, 2014, interest payable annually $2,368,000 2. March 1, 2017, expenditure included land costs of $222,000 3. Interest revenue earned in 2017 $72,520

Explanation / Answer

SOLUTION

Computation of actual interest-

Computation of avoidable interest-

Weighted average accumulated expenditures * Interest rate = Avoidable interest

2,257,000 * 13% = $293,410

(A) Amount of interest =  $293,410

(B) Journal entry-

Date Amount ($) (A) Capitalization period (B) Weighted average accumulated expenditure (A*B) March1 532,800 10/12 444,000 June1 888,000 7/12 518,000 July1 2,220,000 6/12 1,110,000 Dec.1 2,220,000 1/12 185,000 5,860,800 2,257,000

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