Question

On December 31, 2016, Flint Inc. borrowed $3,540,000 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, $424,800; June 1, $708,000; July 1, $1,770,000; December 1, $1,770,000. 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		$4,720,000
		6-year, 11% note, dated December 31, 2014, interest payable annually		$1,888,000
2.		March 1, 2017, expenditure included land costs of $177,000
3.		Interest revenue earned in 2017		$57,820

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

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.)

December 31, 2017   

Buildings

Interest Expense

Cash

Answer 1

Requirement 1
	Determination of weighted average Expenditures
	Date of Expenditure	Amount of expenditure		Weight Factor	Weighted average expenditure
	2017
	Mar-01	424800		10/12	106200
	Jun-01	708000		7/12	413000
	Jul-01	1770000		6/12	885000
	Dec-01	1770000		1/12	147500
	Total	4672800
	Weighted average accumulated expenditure				1551700
Requirement 2
	Actual Interest
	Debt	Interest	Actual Interest
Specific Borrowing	3540000	13%	460200
General Borrowing	4720000	14%	660800
General Borrowing	1888000	11%	207680
Total	10148000		1328680
Requirement 2
	Avoidable Interest
	Weighted average interest for other debt			13.14
	Debt	Interest rate	Interest Amount
	4720000	14%	660800
	1888000	11%	207680
	6608000	13.14285714	868480
	Avoidable Interest
	Weighted average expenditure	Interest rate	Avoidable interest
Specific borrowing	1551700	13%	201721
Other debt	0	13.14%	0
	Total		201721
	Since avoidable interest is less thatn actual interest of $1328680, the avoidable
	interest of $201721 will be capitalized.
Date	General Journal		Debit	Credit
December 31, 2017	Buildings		201721
	Interest expense		1126959
		Cash		1328680