On December 31, 2013, Main Inc. borrowed $4,950,000 at 13% payable annually to f

Question

On December 31, 2013, Main Inc. borrowed $4,950,000 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, $594,000; June 1, $990,000; July 1, $2,475,000; December 1, $2,475,000. 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 $6,600,000 6-year, 11% note, dated December 31, 2011, interest payable annually $2,640,000 2. March 1, 2014, expenditure included land costs of $247,500 3. Interest revenue earned In 2014 $80,850 Determine the amount of interest to be capitalized in 2014 in relation to the construction of the building. (Round answer to O decimal places, e.g. 5,275.) The amount of Interest $ SHOW UST OF ACCOUNTS UNK TO TEXT Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2014. (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 O for the amounts.)

Explanation / Answer

Answer:

Average investment=2516250

Avoidable int cost=2516250*13%=327112.5

$327112.5 portion of the interest expense will Mains Inc. capitalize.

Journal entry:

Building A/C Dr. $327112.5

Interest expense A/C Dr. $1398787.5

   To cash A/C                            $1725900

Expenditures, 2014 Average investment 1-Mar 594000 10/12 495000 1-Jun 990000 7/12 577500 1-Jul 2475000 6/12 1237500 1-Dec 2475000 1/12 206250 Total 2516250

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