Question

Exercise 10-8

On December 31, 2016, Splish Inc. borrowed $4,260,000 at 12% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $511,200; June 1, $852,000; July 1, $2,130,000; December 1, $2,130,000. The building was completed in February 2018. Additional information is provided as follows.

1.		Other debt outstanding
		10-year, 13% bond, December 31, 2010, interest payable annually		$5,680,000
		6-year, 10% note, dated December 31, 2014, interest payable annually		$2,272,000
2.		March 1, 2017, expenditure included land costs of $213,000
3.		Interest revenue earned in 2017		$69,580

(A) Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building.

The amount of interest $_________________ (B)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.) Date Account Titles and Explanation Debit Credit December 31, 2017 (List of Accounts) Accounts Payable Accumulated Depreciation-Building Accumulated Depreciation-Equipment Accumulated Depreciation-Machinery Accumulated Depreciation-Trucks Buildings Cash Common Stock Contribution Revenue Cost of Goods Sold Depreciation Expense Direct Labor Discount on Notes Payable Equipment Factory Overhead Gain on Disposal of Buildings Gain on Disposal of Equipment Gain on Disposal of Machinery Gain on Disposal of Trucks Insurance Expense Interest Expense Inventory Land Land Improvements Loss on Disposal of Buildings Loss on Disposal of Equipment Loss on Disposal of Machinery Loss on Disposal of Trucks Machinery Maintenance and Repairs Expense Materials No Entry Notes Payable Organization Expense Paid-in Capital in Excess of Par - Common Stock Prepaid Insurance Retained Earnings Salaries and Wages Expense Sales Revenue Trading Securities Trucks

Answer 1

Answer:-

A) Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building.

Expenditure,2016			Average Investment
March 1	$511,200	10/12	$426,000
June 1	$852,000	7/12	$497,000
July 1	$2,130,000	6/12	$1,065,000
December 1	$2,130,000	1/12	$177,500
			$2,165,500

Loans		issued	Actual Int Cost
12% to finance construction	$4,260,000	12/31/2017	$511,200
13% Bond	$5,680,000	Years ago	$738,400
10% Bond	$2,272,000	Years ago	$227,200
			$1,476,800

The amount of interest is

Average Investment = $2,165,500*12%=$259,860

(b)

Date	Particular	Debit	Credit
December 31, 2017	Building A/C                       ---------------- Dr	$259,860
	Interest Expenses A/C         ----------------Dr	$1,216,940
	To Cash A/C		$1,476,800