[lil student]

I don't know where to begin... Can someone help me out?



On December 31, 2013, Main Inc. borrowed $3,330,000 at 12% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures related to this building: March 1, $399,600; June 1, $666,000; July 1, $1,665,000; December 1, $1,665,000. The building was completed in February 2015. Additional information is provided as follows.





1.Other debt outstanding
10-year, 11% bond, December 31, 2007, interest payable annually $4,440,000
6-year, 10% note, dated December 31, 2011, interest payable annually$1,776,000

2. March 1, 2014, expenditure included land costs of $166,500

3. Interest revenue earned in 2014 $54,390

Determine the amount of interest to be capitalized in 2014 in relation to the construction of the building. (Round answer to 0 decimal places, e.g. 5,275.)

So I need to calculate the amount of interest and then prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2014.

[FrancisArthur]

The amount of interest to be capitalized is the lesser of a) The avoidable interest and b) Actual interest paid.

I - Calculate the amount of interest

The first step is to calculate the avoidable interest and this is achieved by calculating the amount of interest that would be paid on the "Weighted Average Accumulated expenditures'.
(a) Weighted Average Accumulated Expenditures Calculation:

Date of Expenditures Amount Period (1) Accum. Expend.
March 1, 2014 399600 10/12 333,000
June 1, 2014 666,000 7/12 388,500
July 1, 2014 1,665,000 6/12 832,500
December 1, 2012 1,665,000 1/12 138,750
Total 4,395,600 1,692,750
(1) period the amounts are outstanding as a fraction of the full year)

Avoidable interest for the construction loan is:
Accum. Expend X Interest rate on the construction loan = 1,692,750 X .12 = 203130, i.e. Avoidable interest (a) = 203130

(b)- Actual interest calculation Interest

- Construction note $3,330,000 at 12% = 399600
- Other debt outstanding
10-year, bond $4,440,000 at 11% = 488400
6-year, note, $1,776,000 at 10% = 177600
Total actual interest for the year 1065600 (b)

Lesser of (a) or (b), i.e. lesser of 203,130 (a) or 1,065,600 (b) is 203,130 (a).

Since avoidable interest is less than actual interest, then capitalize amount of avoidable interest i.e. 203,130 (a).
The difference between the actual interest and avoidable interest is classified as Interest Expense.



II- Journal Entries for Capitalized Interest and Interest Expense

Buildings 203,130
Interest Expense 862,470

Cash 1,065,600