On December 31, 2019, Sandhill Inc. borrowed $3,060,000 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, $367,200; June 1, $612,000; July 1, $1,530,000; December 1, $1,530,000. 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 | $4,080,000 | |||
| 6-year, 11% note, dated December 31, 2017, interest payable annually | $1,632,000 | |||
| 2. | March 1, 2020, expenditure included land costs of $153,000 | |||
| 3. | Interest revenue earned in 2020 | $49,980 |
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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List of Accounts
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 | |||
Calculated of Weighted average accumulated expenditure
| Date | Expenditure | * | Months | = | Weighted average accumulated expenditure |
| March 1 | $367200 | * | 10/12 | = | $306000 |
| June 1 | 612000 | * | 7/12 | = | 357000 |
| July 1 | 1530000 | * | 6/12 | = | 765000 |
| Dec 1 | 1530000 | * | 1/12 | = | 127500 |
| Weighted average accumulated expenditure | $1555500 | ||||
Avoidable interest= Weighted average accumulated expenditure*Interest rate
= $1555500*13%= $202215
Calculation of Actual interest
| Amount | * | Interest rate | = | Actual interest | |
| Construction loan | $3060000 | * | 13% | = | $397800 |
| 14% Bonds | 4080000 | * | 14% | = | 571200 |
| 11% note | 1632000 | * | 11% | = | 179520 |
| Actual interest | $1148520 | ||||
Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building.
| The amount of interest |
$202215 |
Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2020.
|
Date |
Account Titles and Explanation |
Debit |
Credit |
| December 31, 2020 | Building | $202215 | |
| Interest expense ($1148520-202215) | $946305 | ||
| Cash | $1148520 | ||
| (To record interest capitalized and interest expense) |
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