On December 21, 2013, Jumble Inc. borrowed $1,000,000 at 10% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures realated to this building.Jun-1    $400,000July-1    $600,000Sep-1    $1,200,000Dec-1   $600,000The building was completed in April 2015. Additional information is provided as follows:1) other debt outstanding:10-year, 8% bond dated December 31,2012, interest payable annually $10,000,00015-year, 10% note, dated December 31, 2012, interest payable annually $2,500,0002) Interest revenue earned in 2014                  $6,000INSTRUCTIONS: A) Determine the amount of interest to be capitalized in 2014 in relation to the construction of the buildingB) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2014

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Asked Dec 3, 2019
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On December 21, 2013, Jumble Inc. borrowed $1,000,000 at 10% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures realated to this building.

Jun-1    $400,000

July-1    $600,000

Sep-1    $1,200,000

Dec-1   $600,000

The building was completed in April 2015. Additional information is provided as follows:

1) other debt outstanding:

10-year, 8% bond dated December 31,2012, interest payable annually $10,000,000

15-year, 10% note, dated December 31, 2012, interest payable annually $2,500,000

2) Interest revenue earned in 2014                  $6,000

INSTRUCTIONS: 

A) Determine the amount of interest to be capitalized in 2014 in relation to the construction of the building

B) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2014

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Expert Answer

Step 1

A.

Step 1:

Detemine the amount of weighted average accumulated depreciation.

Expenditures
Weighted average accumulated
depreciation (A-B/C)*100
Amount in $ (A Interest (B) Captialization period (c)=
Date
10%x 7 months
10%x 6 months
10%x4 months
10%x1 month
Jun-01
400,000
233,333.33
300,000.00
Jul-01
600,000
1,200,000x
600,000 X
2,800,000
Sep-01
400,000.00
Dec-01
50,000.00
Total
983,333.33
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Expenditures Weighted average accumulated depreciation (A-B/C)*100 Amount in $ (A Interest (B) Captialization period (c)= Date 10%x 7 months 10%x 6 months 10%x4 months 10%x1 month Jun-01 400,000 233,333.33 300,000.00 Jul-01 600,000 1,200,000x 600,000 X 2,800,000 Sep-01 400,000.00 Dec-01 50,000.00 Total 983,333.33

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Step 2

Step 2:

Determine the weighted average interest rate :

 

Actual interestWorking note
100,000 (1,000,000x10%
800,000 (10,000,000x8%)
250,000 (2,500,000x10%
1.150,000
Particulars
Principal
10% of construction loan
10 year 8% bond
15 year 10% note
1,000,000
10,000,000
2,500,000
13.500,000
= Interest / Principal
Weighted Average interest rate
=1,150,000/13,500,000
8.52%
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Actual interestWorking note 100,000 (1,000,000x10% 800,000 (10,000,000x8%) 250,000 (2,500,000x10% 1.150,000 Particulars Principal 10% of construction loan 10 year 8% bond 15 year 10% note 1,000,000 10,000,000 2,500,000 13.500,000 = Interest / Principal Weighted Average interest rate =1,150,000/13,500,000 8.52%

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Step 3

Step 3:

Determine the amount of inte...

Weighted Average interest rate
Captilization rate
Avoidable interest
$983,333
10%=
$98,333.33
Total avoidable interest
$98,333.33
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Weighted Average interest rate Captilization rate Avoidable interest $983,333 10%= $98,333.33 Total avoidable interest $98,333.33

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