Question

Exercise 10-8 (Part Level Submission)

On December 31, 2016, Larkspur Inc. borrowed $3,300,000 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, $396,000; June 1, $660,000; July 1, $1,650,000; December 1, $1,650,000. 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		$4,400,000
		6-year, 11% note, dated December 31, 2014, interest payable annually		$1,760,000
2.		March 1, 2017, expenditure included land costs of $165,000
3.		Interest revenue earned in 2017		$53,900

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.)

Answer 1

Date	Amount	Period	Weighted average expenditure
Mar-01	3,96,000	10/12	3,30,000
Jun-01	6,60,000	7/12	3,85,000
Jul-01	16,50,000	6/12	8,25,000
Dec-01	16,50,000	1/12	1,37,500
			16,77,500
Loans		Issued	Actual interest cost
13% to finance construction	33,00,000	12/31/16	4,29,000
14% bond	44,00,000	years ago	6,16,000
11% bond	17,60,000	years ago	1,93,600
			12,38,600
Average investment = $16,77,500
Avoidable interest cost = $16,77,500 * 13% = $218,075.

date	Account titles and explanation	debit($)	credit($)
December 31, 2017	Building	2,18,075
	Interest Expense (balancing figure)	10,20,525
	Cash		12,38,600