Question

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

Answer 1

Answer:

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