Question

# On December 31, 2019, Sandhill Inc. borrowed \$3,060,000 at 13% payable annually to finance the construction...

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)