Question

During 2018, the COYOTE Company spent $4,000,000 for various construction projects which are qualified for capitalization of interest. The total expenditures of $4,000,000 were made as follows: $1,000,000 on 1/1/2018, $2,000,000 on 4/1/2018, and $1,000,000 on 10/1/2018. The company had the following debts outstanding as of December 31, 2018:

1. 6%, 5-year note to finance construction of various assets, dated January 1, 2017, with interest payable annually on each January 1. $1,500,000

2. 8%, 15-year bonds issued at par on December 31, 2015, with interest payable annually on each December 31 $2,000,000

3. 10%, 10-year note payable, dated January 1, 2017, with interest payable annually on each January 1 $4,000,000

Instructions:

Prepare the journal entries for the asset qualifying for capitalization of interest, interest expense, and interest payment on December 31, 2018.

Answer 1

During 2018, the COYOTE Company spent $4,000,000 for various construction projects which are qualified for capitalization of interest. The total expenditures of $4,000,000 were made as follows: $1,000,000 on 1/1/2018, $2,000,000 on 4/1/2018, and $1,000,000 on 10/1/2018. The company had the following debts outstanding as of December 31, 2018:

1. 6%, 5-year note to finance construction of various assets, dated January 1, 2017, with interest payable annually on each January 1. $1,500,000

2. 8%, 15-year bonds issued at par on December 31, 2015, with interest payable annually on each December 31 $2,000,000

3. 10%, 10-year note payable, dated January 1, 2017, with interest payable annually on each January 1 $4,000,000

Instructions:

Prepare the journal entries for the asset qualifying for capitalization of interest, interest expense, and interest payment on December 31, 2018.

EXPLANATION ::-

	Total interest charged during the period
1	6% 5-year note for 1500000	1500000*6%*12/12	90000
2	8% 15-year bonds for 2000000	2000000*8%*12/12	160000
3	10% 10-year note for 4000000	4000000*10%*12/12	400000
	Total interest accrual		650000
	Total borrowing	1500000 + 2000000 + 4000000	7500000
	Expenditure for construction projects		4000000
	Interest that can be capitalised =	650000 * (4000000/7500000)	346667
	Interest expense =	650000-346667	303333

Journal entries:
Particulars	Debit ($)	Credit ($)
Asset	346667
Interest payable		346667
To capitalise the interest expense
Interest expense	303333
Interest payable		303333
To record interest expense for the year
Interest payable	650000
Cash at Bank		650000
To record payment of interest