Question

Stephenson Inc. began to construct a building for its use on January 1, 2018. All costs associated with the construction are being debited to an account called “Construction-in-Progress.” The construction will take approximately 24 months. Weighted-average expenditures for 2018 have already been determined to be $1,800,000.

The company has one specific as well as two non-specific loan borrowings. Details are as follows:

Specific Loan Borrowing: $1,000,000 loan at 12% taken out 1/1/2018 and due in 2019.

Non-specific Borrowings:

Note #1: $500,000 at 9%. This loan was outstanding for all of 2018 and is due in 2019.

Note #2: $700,000 at 12%. This loan was outstanding for all of 2018 and is due in 2020.

Part A: What portion of the interest on the above loans should be capitalized in 2018? Important: Round interest rates to two decimal places (ex. .114321 = 11.43%)

                                                                                                            Answer: $__________

Part B: If the company has already accrued and paid the 2018 interest costs on these three loans by debiting “Interest Expense” and crediting “Cash”, what should be the adjusting journal entry it makes on 12/31/18 to capitalize the interest amount calculated in Part A?

		Debit	Credit
12/31/18

Answer 1

Solution A:

Weighted average accumulated expenditure for 2018 = $1,800,000

The interest related to specific borrowing of $1,000,000 will be completely capitalized. Further for remaining $800,000 loan average interest rate of general borrowing will be used for capitaliation purpose.

Interest on specific borrowings = $1,000,000 * 12% = $120,000

Weighted average interest rate of general borrowings = 9% * 5/12 + 12% * 7/12= 10.75%

Interest to be capitalized out of general borrowings = ($1,800,000 - $1,000,000) * 10.75% = $86,000

Total interest to be capitalized in 2018 = $120,000 + $86,000 = $206,000

Solution B:

Journal Entries - Stephenson Inc
Date	Particulars	Debit	Credit
31-Dec-18	Construction in Progress Dr	$206,000.00
	To interest expense		$206,000.00
	(To record correction entry of interest expense)