Question

# On December 31, 2019, Sheffield Inc. borrowed \$3,240,000 at 13% payable annually to finance the construction...

On December 31, 2019, Sheffield Inc. borrowed \$3,240,000 at 13% payable annually to finance the construction of a new building. In 2020, the company made the following expenditures related to this building: March 1, \$388,800; June 1, \$648,000; July 1, \$1,620,000; December 1, \$1,620,000. The building was completed in February 2021. Additional information is provided as follows.

 1. Other debt outstanding 10-year, 14% bond, December 31, 2013, interest payable annually \$4,320,000 6-year, 11% note, dated December 31, 2017, interest payable annually \$1,728,000 2. March 1, 2020, expenditure included land costs of \$162,000 3. Interest revenue earned in 2020 \$52,920

Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building.

 The amount of interest \$

Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2020. (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 December 31, 2020

Expenditure 2020

 Average Investment March 1 \$388800 10/12 \$324000 June 1 \$648000 7/12 \$378000 July 1 \$1620000 6/12 \$810000 December 1 \$1620000 1/12 \$135000 \$1647000
 Loans Amount Issued Actual Interest Cost 13% to finance construction \$3240000 12/31/22016 \$421200 14% Bond \$4320000 Year ago \$604800 11% Note \$1728000 Year ago \$190080 \$1216080

(a) Amount of interest to be capitalized = Average Investment x 12%

=> \$1647000 x 13% = \$214110

(b)

 Account Titles Debit Credit Building \$214110 Interest Expense \$1001970 Cash \$1216080

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