Prepare the journal entry to record the capitalization of interest and the recog
ID: 2566736 • Letter: P
Question
Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Date
Account Titles and Explanation
Debit
Credit
On December 31, 2016, Flint Inc. borrowed $4,140,000 at 13% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, $496,800; June 1, $828,000; July 1, $2,070,000; December 1, $2,070,000. The building was completed in February 2018. Additional information is provided as follows.1. Other debt outstanding 10-year, 14% bond, December 31, 2010, interest payable annually $5,520,000 6-year, 11% note, dated December 31, 2014, interest payable annually $2,208,000 2. March 1, 2017, expenditure included land costs of $207,000 3. Interest revenue earned in 2017 $67,620
Explanation / Answer
Answer: Requirement 1 The interest cost to be capitalize is calculated as follows: Expenditure Date Amount Capitalization period Weighted average Accumulated Expenditure 1-Mar $ 496,800.00 10/12 $ 414,000.00 (496,800*10/12) 1-Jun $ 828,000.00 7/12 $ 483,000.00 ($828000*7/12) 1-Jul $ 2,070,000.00 6/12 $ 1,035,000.00 ($2070,000*6/12) 1-Dec $ 2,070,000.00 1/12 $ 172,500.00 ($2070,000*1/12) Total average investment $ 2,104,500.00 Loans Principal Interest 13% Loan to finance construction of new building $ 4,140,000.00 $ 538,200.00 14%, 10-years bond $ 5,520,000.00 $ 772,800.00 11%, 6-years note $ 2,208,000.00 $ 242,880.00 $ 1,553,880.00 Weighted average Accumulated Expenditure X Interest rate = Avoidable Interest $ 2,104,500.00 X 13% $ 273,585.00 ($2,104,500*13% Therefore, Flint, Inc would capitalize $273,585 as interest cost The amount of interest to be capitalize $ 273,585.00 Requirement 2 Journal Entry Date Account title and explanation Debit Credit Building $ 273,585.00 Interest Expense $ 1,280,295.00 (1,553,800-273,585) Cash $ 1,553,880.00 (To record interest amount to be capitalize and interest expense to be recorded)