Question

On December 31, 2019, Ayayai Inc. borrowed $3,720,000 at 13% payable annually to finance the construction...

On December 31, 2019, Ayayai Inc. borrowed $3,720,000 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, $446,400; June 1, $744,000; July 1, $1,860,000; December 1, $1,860,000. 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 $4,960,000 6-year, 11% note, dated December 31, 2017, interest payable annually $1,984,000 2. March 1, 2020, expenditure included land costs of $186,000 3. Interest revenue earned in 2020 $60,760 (a) Correct answer iconYour answer is correct. Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building. The amount of interest $ 245830 eTextbook and Media List of Accounts Attempts: 2 of 3 used (b) 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.)

Homework Answers

Answer #1

Ans:

1. Amount of interest to be capitalized in 2020 in relation to the construction of the building:

Date Amount Time Weighted Average Expenditure
March 1 446,400 10 Month 372,000
June 01 744,000 7 Month 434,000
July 01 1,860,000 6 Month 930,000
December 01 1,860,000 1 Month 155,000
1,891,000

Amount of Interest to be Capitalized= 1,891,000*13%

=> 245,830 {Avoidable Interest}

Actual Amount of Interest:

Particulars Amount Rate Interest
Borrowed Amount 3,720,000 13% 483,600
14% bond, 10 Year debt 4,960,000 14% 694,400
11% note, 6 Year 1,984,000 11% 218,240
Total 1,396,240

2. Journal Entry

Date Account title and explanation Debit($) Credit($)
Building 245,830
Interest Expenses 1,150,410
Cash 1,396,240
{ to record the capitalization of Interest}
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