Question

On December 31, 2019, Novak Inc. borrowed $4,440,000 at 13% payable annually to finance the construction of a new building. In 2020, 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 2021. Additional information is provided as follows.

1.		Other debt outstanding
		10-year, 14% bond, December 31, 2013, interest payable annually		$5,920,000
		6-year, 11% note, dated December 31, 2017, interest payable annually		$2,368,000
2.		March 1, 2020, expenditure included land costs of $222,000
3.		Interest revenue earned in 2020		$72,520

Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building.

The amount of interest

$

List of Accounts

  

  

Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2020. (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
December 31, 2020

Answer 1

we will find weighted average accumulated expendituresand interest to be capitalised

Date	Amount	capitalization period	weighted average expenditure
March 1	$532,800	10/12	$444,000[$532,800*10/12]
June 1	$888,000	7/12	$518,000[$888,000*7/12]
July 1	$2,220,000	6/12	$1,110,000[$2,220,000*6/12]
Dec 1	$2,220,000	1/12	$185,000[$2,220,000*1/12]
		weighted average	$2,257,000
		Interest rate	13%
	Answer 1	Interest to be capitalised in 2020	$293,410[$2,257,000*13%]

Interest expense:

Debt	Amount	Interest rate	interest amount
14% bond	$5,920,000	14%	$828,800[$5,920,000*14%]
11% note	$2,368,000	11%	$260,480[$2,368,000*11%]
construction loan	$4,440,000	13%	$577,200[$4,440,000*13%]
		Total interest incurred	$1,666,480
		Less: interest capitalized	$293,410
		interest expense	$1,373,070[$1,666,480-293,410]

journal entry

		debit	Credit
31 Dec	Building	$293,410
	Interest expense	$1,373,070
	cash		$1,666,480