Question

On December 31, 2019, Cheyenne Inc. borrowed $3,960,000 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, $475,200; June 1, $792,000; July 1, $1,980,000; December 1, $1,980,000. 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		$5,280,000
		6-year, 11% note, dated December 31, 2017, interest payable annually		$2,112,000
2.		March 1, 2020, expenditure included land costs of $198,000
3.		Interest revenue earned in 2020		$64,680

Determine the amount of interest to be capitalized in 2020 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, 2020.

Answer 1

the values provided in the question as follows

Loan Borrowed for construction = $ 3,960,000

Interest rate on construction loan = 13%

Expenditure incurred

March 1 = $ 475,200

June 1 = $ 792,000

July 1 = $ 1,980,000

Deceber 1= $ 1,980,000

step 1 = calculation of total interest for the year ending 31st December 2020

borrowed to finance the construction $ 39,60,000 X 13% = $ 514,800

10-year, 14% bond $ 5,280,000 X 14% = $ 739,200

6-year, 11% note $ 2,112,000 X 11% = $ 232,320

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TOTAL $1,486,320

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Following schedule calculates the weighted-average accumulated expenditures:

Expenditure Date	Amount (A)	Capitalisation Period (B)	Weight (C)=(B)/12	Weighted Expenditure (A)x(C)
March 1	$ 475,200	10	0.83	$396,000
June 1	$ 792,000	7	0.58	$462000
July 1	$ 1,980,000	6	0.50	$990,000
Deceber 1	$ 1,980,000	1	0.58	$165,000
Total	2,013,000

Interest on the above $2,013,000 x 13% = $ 261,690

hence interest on loan to be capitalised = $ 261,690

Interest to be shown as expenses = $1,486,320(Total Interest) - $ 261,690

= 1,224,630

JOURNAL ENTRY 1:

New Building	$ 261,690
Interest Expenses(Cash)		$ 261,690

JOURNAL ENTRY 2:

Interest Expenses	$ 1,224,630
Cash		$ 1,224,630