what amount of interest should be capitalized during 2021?
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- Gray Companys financial statements showed income before income taxes of 4,030,000 for the year ended December 31, 2020, and 3,330,000 for the year ended December 31, 2019. Additional information is as follows: Capital expenditures were 2,800,000 in 2020 and 4,000,000 in 2019. Included in the 2020 capital expenditures is equipment purchased for 1,000,000 on January 1, 2020, with no salvage value. Gray used straight-line depreciation based on a 10-year estimated life in its financial statements. As a result of additional information now available, it is estimated that this equipment should have only an 8-year life. Gray made an error in its financial statements that should be regarded as material. A payment of 180,000 was made in January 2020 and charged to expense in 2020 for insurance premiums applicable to policies commencing and expiring in 2019. No liability had been recorded for this item at December 31, 2019. The allowance for doubtful accounts reflected in Grays financial statements was 7,000 at December 31, 2020, and 97,000 at December 31, 2019. During 2020, 90,000 of uncollectible receivables were written off against the allowance for doubtful accounts. In 2019, the provision for doubtful accounts was based on a percentage of net sales. The 2020 provision has not yet been recorded. Net sales were 58,500,000 for the year ended December 31, 2020, and 49,230,000 for the year ended December 31, 2019. Based on the latest available facts, the 2020 provision for doubtful accounts is estimated to be 0.2% of net sales. A review of the estimated warranty liability at December 31, 2020, which is included in other liabilities in Grays financial statements, has disclosed that this estimated liability should be increased 170,000. Gray has two large blast furnaces that it uses in its manufacturing process. These furnaces must be periodically relined. Furnace A was relined in January 2014 at a cost of 230,000 and in January 2019 at a cost of 280,000. Furnace B was relined for the first time in January 2020 at a cost of 300,000. In Grays financial statements, these costs were expensed as incurred. Since a relining will last for 5 years, Grays management feels it would be preferable to capitalize and depreciate the cost of the relining over the productive life of the relining. Gray has decided to nuke a change in accounting principle from expensing relining costs as incurred to capitalizing them and depreciating them over their productive life on a straight-line basis with a full years depreciation in the year of relining. This change meets the requirements for a change in accounting principle under GAAP. Required: 1. For the years ended December 31, 2020 and 2019, prepare a worksheet reconciling income before income taxes as given previously with income before income taxes as adjusted for the preceding additional information. Show supporting computations in good form. Ignore income taxes and deferred tax considerations in your answer. The worksheet should have the following format: 2. As of January 1, 2020, compute the retrospective adjustment of retained earnings for the change in accounting principle from expensing to capitalizing relining costs. Ignore income taxes and deferred tax considerations in your answer.Pinecone Company has plan assets of 500,000 at the beginning of the current year and expects to earn 12% on its plan assets during the year. Pinecones service cost is 230,000, and its interest cost is 55,000. Compute Pine-cones pension expense for the current year.On August 1, 2019, Kern Company leased a machine to Day Company for a 6-year period requiring payments of 10,000 at the beginning of each year. The machine cost 40,000 and has a useful life of 8 years with no residual value. Kerns implicit interest rate is 10%, and present value factors are as follows: Present value for an annuity due of 1 at 10% for 6 periods4.791 Present value for an annuity due of 1 at 10% for 8 periods5.868 Kern appropriately recorded the lease as a sales-type lease. At the inception of the lease, the Lease Receivable account balance should be: a. 60,000 b. 58,680 c. 48,000 d. 47,910
- Long-Term Financing Needed At year-end 2018, Wallace Landscapings total assets were 2.17 million, and its accounts payable were 560,000. Sales, which in 2018 were 3.5 million, are expected to increase by 35% in 2019. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to 625,000 in 2018, and retained earnings were 395,000. Wallace has arranged to sell 195,000 of new common stock in 2019 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2019. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of earnings will be paid out as dividends. a. What were Wallaces total long-term debt and total liabilities in 2018? b. How much new long-term debt financing will be needed in 2019? [Hint: AFN New stock = New long-term debt.)During 2021, Happy Company constructed asset costing P10,000,000. The weighted average expenditures totaled P6,000,000. To help pay for the construction, P4,400,000 was borrowed at 10% on January 1, 2021. Funds not needed for construction were temporarily invested in short-term securities yielding P90,000 in interest revenue. Other than the construction funds borrowed, the only other debt outstanding during the year was P5,000,000, 10-year, 9% note payable dated January 1, 2020. What amount of interest should be capitalized during 2021?During 2019, Bing Company constructed its own equipment costing P5,000,000. The weighted average accumulated expenditure on these assets during 2019 was P2,500,000. To help finance the construction, P1, 800,000 was borrowed at 10% on January 1, 2019, and funds not needed for construction were temporarily invested in short-term securities, yielding P45,000 in interest revenue. Other than the construction funds borrowed, the only other debt outstanding during the year was a P2,500,000, 10-year, 9% notes payable dated January 1, 2019. What is the amount of interest that should be capitalized by Bing during 2019?
- On January 1, 2021, Hamlet Company borrowed P6,000,000 at an annual interest rate of 10% to finance specifically the cost of building an electricity generating plant. Construction commenced on January 1, 2021 with a cost P6,000,000. Not all the cash borrowed was used immediately, so interest income of P80,000 was generated by temporarily investing some of the borrowed funds prior to use. The project was completed on November 30, 2021. What is the carrying amount of the plant on November 30, 2021?Likes Company started construction of a low-rise building for its own use on January 1, 2021. Upon completion at December 31, 2021, construction costs totaled P21,500,000, which were incurred evenly during the construction period. Prior to the start of construction, Likes Company obtained a P10M, 12%, 5-year loan from ABC Bank to finance the project. During periods that construction costs were low, the company temporarily investment the proceeds and earned interest income of P50,000. In addition to the specific borrowing, prior to the construction, the company had a general borrowing amounting to P600,000 with interest of 15% and a four-year term that was used in part in the self construction?How much is the capitalized interest on the self-constructed building of Likes Company?During 2021, Colorado Company constructed a 3-storey building. The weighted average expenditures for capitalization of interest during 2021 amounted to P 23,600,000. The existing debt of Colorado are the following: From Union Bank (specific borrowing), P 3,600,000, 10% From Land Bank (general borrowing), P 6,000,000, 20% From Security Bank (general borrowing), P 10,000,000, 18% What is the capitalized borrowing costs for the year ended December 31, 2021? A. 4,110,000 B. 3,750,000 C. 3,788,000 D. 3,360,000 What is the interest expense for the year ended December 31, 2021? A. 322,000 B. 390,000 C. 750,000 D. 0
- On January 1, 2018, Imp Company borrowed P6 million at an annual interest rate of 10% to finance the costs of building an electricity generating plant. Construction commenced on January 1, 2018 and cost P6 million. Not all the cash borrowed was used immediately, so interest income of P80,000 was generated by temporarily investing some of the borrowed funds prior to use. The project was completed on November 30, 2018. What is the carrying amount of the plant at November 30, 2018? a. 6,000,000b. 6,470,000c. 6,520,000d. 6,420,000 What is the solution for option B?On January 1, 2021, Shangrila Company borrowed P2,000,000 at an interest rate of 12% specifically for the construction of a new building. The actual interest cost on this specific borrowings was P240,000 but interest of P10,000 was earned from the temporary investment of the borrowings proceeds. Shangrila Company also had the following other loans in 2021 which were borrowed for general purposes but the proceeds were used in part for the construction of the building. 10% bank loan – Principal – 3,000,000; Interest – 300,000 12% long term loan – Principal – 5,000,000; Interest – 600,000 The construction began on January 1, 2021 and was completed on December 31, 2021. The expenditures on the construction were P2,000,000 on January 1, P1,000,000 on March 31 and P3,000,000 on September 30. Required: Compute the cost of the new building.Novak, Inc. has a fiscal year ending April 30. On May 1, 2020, Novak borrowed $10,728,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2021, weighted-average accumulated expenditures were $3,754,800. Interest earned on the unexpended portion of the loan amounted to $697,320 for the year.How much should be shown as capitalized interest on Novak’s financial statements at April 30, 2021? Capitalized interest on Novak’s financial statements $
