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Exercise 10-08 On December 31, 2019, Blue Inc. borrowed $4,260,000 at 12% payable annually to finance...

Exercise 10-08

On December 31, 2019, Blue Inc. borrowed $4,260,000 at 12% payable annually to finance the construction of a new building. In 2020, the company made the following expenditures related to this building: March 1, $511,200; June 1, $852,000; July 1, $2,130,000; December 1, $2,130,000. The building was completed in February 2021. Additional information is provided as follows.
1. Other debt outstanding
10-year, 13% bond, December 31, 2013, interest payable annually $5,680,000
6-year, 10% note, dated December 31, 2017, interest payable annually $2,272,000
2. March 1, 2020, expenditure included land costs of $213,000
3. Interest revenue earned in 2020 $69,580
Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building.
The amount of interest $
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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

Homework Answers

Answer #1

a). Calculation of amount of interest:

Expenditure ($) ($) Average investment($)
March 1 511,200 10/12 426,000
June 1 852,000 7/12 497,000
July 1 2,130,000 6/12 1,065,000
December 1 2,130,000 1/12 177,500
Average investment 2,165,500
Loans ($) Issue date Actual cost($)
12%to financial constructions 4,260,000 12/31/19 511,200
13% to bonds 5,680,000 years ago 738,400
10% Notes 2,272,000 years ago 227,200
1,476,800

*Average investment. = $2,165,500

*Avoidable interest cost. = $2,165,500*12%. = $259,860

b). Journal entry:

Date accounts & explanation Debit($) credit($)
December 31 Building a/c 259,860
2020 interest expense a/c 1,216,940
Cash 1,476,800
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