b. Prepare the journal entry to record the capitalization of interest and the re

Question

b. 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.)

Date

Account Titles and Explanation

Debit

Credit

On December 31, 2016, Cullumber Inc. borrowed $3,180,000 at 12% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $381,600; June 1, $636,000; July 1, $1,590,000; December 1, $1,590,000. The building was completed in February 2018. Additional information is provided as follows.
1. Other debt outstanding 10-year, 13% bond, December 31, 2010, interest payable annually $4,240,000 6-year, 10% note, dated December 31, 2014, interest payable annually $1,696,000 2. March 1, 2017, expenditure included land costs of $159,000 3. Interest revenue earned in 2017 $51,940

Explanation / Answer

Answer a

Note :

Computation of Weighted-Average Accumulated Expenditures

Avoidable Interest = Weighted-Average Accumulated Expenditures * Interest rate (of loan for construction building)

= $1,616,500 * 12 % = $193,980

Computation of Actual Interest Paid

Final Answer

Since Avoidable Interest is less than Total Actual Interest , thus Avoidable Interest shall be use for capitalization purpose.

Interest to be capitalized in 2017 in relation to the construction of the building = $193,980

Answer b

Journal Entries

Credit ($)

Months Amount ($) Capitalization Period Weighted-Average Accumulated Expenditures ($) March 1 381,600 10 /12 318,000 June 1 636,000 7/12 371,000 July 1 1,590,000 6/12 795,000 December 1 1,590,000 1/12 132,500 Total $1,616,500

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