Question

Acme, Inc., a subsidiary of J & J, during 2015, began and completed a small warehouse. Construction on the warehouse began January 2, of 2015. Expenditures were made as follows: January 2, $1,000,000, March 1, $900,000, July 1, $400,000 and Oct. 1, $800,000. J & J financed the project by issuing $1,000,000 in stock at the beginning of 2015 and borrowed $1,200,000 from The Last National Bank at an interest rate of 8%. In addition, Acme had the following debt: $1,000,000, interest rate of 9% borrowed in 2010, $2,000,000, 10% note borrowed in 2012.

Requirements:
a. Calculate the 2015 weighted average accumulated expenditures b. How much is avoidable interest
c. How much is actual interest
d. Make the entry capitalizing the interest.

Answer 1

Answer

A.weighted average accumulated expenditures for 2015:

Date	Expenditures	Period	Weighted average expenditures
2-jan	10,00,000	12/12	10,00,000
1-march	9,00,000	10/12	7,50,000
1-jul	4,00,000	6/12	2,00,000
1-oct	8,00,000	3/12	2,00,000
	Total		21,50,000

weighted average accumulated expenditures for 2015 : 21,50,000

B.

Avoidable interest= Weighted average expenditures*Actual interest / Total loan amount

=2150000*386000 / (1200000+1000000+2000000)

=197595

C.Actual Interest=

8% loan                            =1200000*8%     =96000

9% note borrowed              =1000000*9%   =90000

10% note borrowed           =2000000*10%     =200000

Total interest                                                 =386000

D. Journal Entry:

Date	Particulars	DR($)	CR($)
31-12-2015	Ware house construction	197595
	Interest Expenses		197595
	(Being record capitalization of interest)