Question

On July 31, 2017, Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2017. To help finance construction, on July 31 Amsterdam issued a $300,000, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $200,000 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Amsterdam made a final $100,000 payment to Minsk. Other than the note to Netherlands, Amsterdam's only outstanding liability at December 31, 2017, is a $30,000, 8%, 6-year note payable, dated January 1, 2014, on which interest is payable each December 31.

Instructions

(a)  

Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2017. (Round all computations to the nearest dollar.)

(b)  Prepare the journal entries needed on the books of Amsterdam Company at each of the following dates.

• 1.July 31, 2017.
• 2.November 1, 2017.
• 3.December 31, 2017.

Answer 1

		Computation of Weighted average accumulated expenditure
a)	Date	Amount	Capitalization period	Weighted average accumulated expenditure
	31st July	$          2,00,000.00	3 months(From 1st august to 31st october)	($200000*3/12)=	50000
	1st November	$          1,00,000.00	0		0
	Total				50000
	Interest Revenue=($100000*3/12*10%)=	$                2,500.00
	Calculation of avoidable interest
	Weighted Average accumulated expenditure*Interest Rate=($50000*12%)=	$                6,000.00
	Actual Interest
	$300000*5/12*12%=	$              15,000.00
	$30000*8%=	$                2,400.00
	Total Actual Interest	$              17,400.00
	Capitalized Interest=(Avoidable Interest-Interest Revenue)=($6000-$2500)=	$                3,500.00
b)
Date	General,Journal	Debit	Credit
July 31st	Cash	$          3,00,000.00
	To Note Payable		$                     3,00,000.00
	(Being amount received from Netherlands National Bank)
	Machinery	$          2,00,000.00
	Short term Investment	$          1,00,000.00
	To Cash		$                     3,00,000.00
	(Being amount Invested $200000 in machinery & $100000 in short term investment)
November 1st	Cash	$          1,02,500.00
	To Interest Revenue		$                           2,500.00
	To Investment		$                     1,00,000.00
	(Being amount invested and interest received )
	Machinery	$          1,00,000.00
	To Cash		$                     1,00,000.00
	(Being balance amount of $100000 paid)
December 31st	Machinery	$                3,500.00
	Interest Expense	$              13,900.00
	To Cash		$                           2,400.00
	To Interest Payable		$                        15,000.00
	(Being amount of Interest capitalized)