Mardel corporation borrowed $300,000 at 10% interest from American bank on Janua
ID: 2416748 • Letter: M
Question
Mardel corporation borrowed $300,000 at 10% interest from American bank on January 1, 2004, for the specific purpose of constructing a special purpose equipment to be used in its operations. Construction on the equipment began on January 1, 2004, and the following expenditures were prior to the projects completion on December 31, 2004,
Expenditure made in 2004,
January 1 $200,000,
April 30 $300,000,
November 1 $600,000,
December 1 $300,000,
total expenditure $1,400,000,
Other general debt existing on January 1, 2004 and issued in 2004 at par was $500,000, 14% 10-year bonds payable and $300,000 10% 5-year notes payable.,
a. does this asset qualify for interest capitalization? why or why not? give detailed explanation based n GAAP.,
b. compute the weighted average accumulated expenditure.,
c. compute the avoidable interest and actual interest. What interest is capitalized? provide journal entry for interest capitalization.
Explanation / Answer
a) Special purpose equipment qualifies because it requires a period of time to get ready and it will be used in the company’s operations.
b)
weighted-average accumulated expenditures. Weighted Average Actual Capitalization Accumulated Date Expenditures Period Expenditures Jan. 1 $ 200,000 12/12 $ 100,000 Apr. 30 300,000 8/12 200,000 Nov. 1 600,000 2/12 100,000 Dec. 1 300,000 1/12 25,000 $ 1,400,000 $ 425,000 c) Actual Interest Debt Interest rate Actual Interest Specific debt 300000 10% 30,000 General debt 500000 14% 70,000 300000 10% 30,000 TOTAL 1100000 130,000 weighted avg debt (70000+30000)/(500000+300000) 12.5% Avoidable Interest Accumulated Exp Interest rate Avoidable interest 300,000.00 10% 30,000 125,000.00 12.50% 15,625 425,000.00 TOTAL 45,625 Journal Debit Credit Equipment 45,625 Interest expense 45,625