Question

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

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