Question

Problem 4
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.

Note, interest is not paid on stock. Please show all your calculations. thanks.

Answer 1

1	Weighted average accumulated expenditure:
			Amount	Months	Weighted Average expenses
	Jan 2.Expenses		1000000	12	(1000000*12/12)=1000000
	Mar 1.Expenses		900000	10	(900000*10/12)=750000
	July 1.Expenses		400000	6	(400000*6/12)=200000
	Oct 1.Expenses		800000	3	(800000*3/12)=200000
	Total					2150000
	Month is calculated from the date of expenditure incurred till Dec 31.
2	Avoidable interest
				Amount of loan	Interest %	Avoidable Interest
				1	2	1*2
	Specific debt			1200000	8%	96000
	General debt
	9% loan			1000000	9.67%	96700
	10% note			2000000	9.67%	193400
					(Note:1)
	Total avoidable interest					386100
	Weighted average interest rate for general debt:
				Amount of loan	Interest %	Interest
	9% loan			1000000	9%	90000
	10% note			2000000	10%	200000
				3000000		290000
	Weighted average interest rate=Total interest expenses/Total amount of loan=290000/3000000=0.0967=9.67%
3	Actual interest:
				Amount of loan	Interest %	Avoidable Interest
				1	2	1*2
	Specific debt			1200000	8%	96000
	General debt
	9% loan			1000000	9.00%	90000
	10% note			2000000	10.00%	200000
	Total actual interest					386000
4	Journal entry
	Date	Account tilts and explanation				Debit	Credit
	Dec 31.	Construction in progress-Warehouse				290000
		Interest payable					290000
		(Capitalizing interest)
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