Question

Date Expenditure Spent The Amount of Expenditure

February 15 $90,000

April 1 $125,000

June 30 $200,000

October 1 $300,000

November 15 $585,000

Liabilities Amount Annual Interest Rate

Bond A $678,000 7.1%

Loan 1 $650,000 6%

Loan 2 $1,000,000 7%

Answer the following questions based on the information above:

Capitalizing interest on the new factory:

1) During the year, Frosty Co. paid all of the interest accrued on Bond A and Loan 1, but only $50,000 of the interest accrued on Loan 2. Using one journal entry, summarize how Frosty originally recorded the accrued interest on all three long-term debts.

2) Assuming John and Elsa are right that the new loan meets the standards for capitalizing interest, calculate avoidable interest.

3) What correcting entries would need to be made to properly record interest on Frosty Co.'s construction project if John and Elsa are right?

4) What would be the effect of interest adjustments on net income, assuming that Frosty Co.’s income tax rate is 30 percent?

5) Obtain the relevant authoritative literature on accounting interest capitalization using the FASB’s Codification Research System. How would you help Simon, John and Elsa to dissolve their disagreement? In other words, whose argument was right? Please make sure to cite FASB Accounting Standard Codification to support your answer. Be specific about the citation number you cite from (e.g., FASB ASC 735-10-25-1).

* construction goes on for the entire year so use 12 monthns in the fractions.

* Use weighted average percentage for interst capilaized.

Answer 1

Answer to first 4 sub-parts as per policy: