A311 Final Exam Review Problem Set Solutions

A311: Final Exam Review
Chapter 10

1. Interest Capitalization

Delmar Corporation borrowed $200,000 at 12% interest from state Bank on January 1, 2013, for the specific purpose of constructing special-purpose equipment to be used in its operations. Construction on the equipment began on 1/1/13, and the following expenditures were made prior to the project’s completion on 12/31/13:

Expenditures Made in 2013
January 1
$100,000
April 30
150,000
November 1
300,000
December 31
100,000
Total Expenditures
$650,000

Other general debt existing on 1/1/13, and issued in 2012 at par was: $500,000, 14%, 10-year bonds payable $300,000, 10%, 5-year note payable

Instructions: Determine the amount of interest to be capitalized, and provide all of the journal entries related to the information above.

Date
Amount
Capitalization Period
Weighted-Average Accumulated Expenditures
Jan. 1
$100,000
12/12
$100,000
Apr. 30 150,000
8/12
100,000
Nov. 1 300,000
2/12
50,000
Dec. 31 100,000
0/12
-

$650,000

$250,000

Accumulated Expenditures
Interest Rates
Avoidable Interest
$200,000
12%*
$24,000
50,000
12.5%**
6,250
$250,000

$30,250

* This is the stated interest rate for the construction-specific debt.
** This is the weighted-average interest rate on general debt calculated as follows:
Total Principal - General Debt

Total Interest
$500,000
14%
$70,000
300,000
10%
30,000
$800,000

$100,000

100,000 = 12.5%

800,000

Actual Interest is computed as followed:

Total Principal
Interest Rate
Total (Actual Interest)
$200,000
12%
$24,000
500,000
14%
$70,000 300,000
10%
$30,000
$1,000,000

$124,000

Capitalize the lesser of avoidable interest; therefore, capitalize the avoidable interest of $30,250.

The journal entries would be as follows:

1/1 Cash 200,000 NP 200,000

Building 100,000 Cash 100,000

4/30 Building 150,000 Cash 150,000

11/1 Building 300,000 Cash 300,000

12/31 Building 100,000 Cash 100,000