Question

On April 1, 2018, Powell hired a contractor to construct a new warehouse. The construction work...

On April 1, 2018, Powell hired a contractor to construct a new warehouse. The construction work commenced on June 1, 2018, and it is expected to continue through May 31, 2019. Powell made progress payments to the contractor in 2018 as follows:

Date

Amount

June 1

$  123,000

July 1

174,000

September 1

81,000

November 1

    33,000

$411,000

As stated previously, Powell took a 1-year, 8%, $175,000 construction loan to help fund the work on this project. The company also has a 4-year, 5%, $654,350 loan that is not related to the construction project.

Give the adjusting entry needed at December 31, 2018 to record the capitalization of interest for this project.

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Answer #1
Calculation of Avoidable Interest Weighted Average expenditure Rate Avoidable Interest
Calculate interest on loan specifically for construction 175,000 8% 14000 Date Amount
Calculate interest on remaining loan up to weighted
average expense		 119,000 5% 5950 1-Jun 123,000 102500
294000 19950 1-Jul 174,000 130500
1-Sep 81,000 47250
a The avoidable interest on this project $19,950 1-Nov 33,000 13750
Weighted cost 294000
Account Title and Explanation Debit Credit
Warehouse Building 19950
Interest Payable 19950
(To record adjusting entry)
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