Chapter 10 Capitalization of Interest Examples and Solutions

Chapter 10 Capitalization of Interest Examples and...

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Capitalization of Interest Examples Solution: Avoidable Interest: Weighted Average Accumulated Expenditures x Interest Rate = Avoidable Interest $ 1,000,000 x 15% = 150,000 $ 800,000 x 10.42 * = 83,360 $ 233,360 *Weighted Average Interest Rate Computation: Principal Interest 10% Short Term loan $ 700,000 $ 70,000 11% Long-term loan $ 500,000 $ 55,000 $1,200,000 $ 125,000 Total Interest $ 125,000 Total Principal = $ 1,200,000 = 10.42% b. Actual Interest Construction Loan $ 1,000,000 x 15% = $ 150,000 Short term loan $ 700,000 x 10% x 5/12= 29,167 Long term loan $ 500,000 x 11% = 55,000 $ 234,167 Because avoidable interest is lower than actual interest, use avoidable interest. Cost $ 2,600,000 Depreciation expense $ 2,833,360 - $ 150,000 = $ 89,445 Interest Capitalized 233,360 30 years Total Cost $ 2,833,360 1
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Unformatted text preview: Solution: Computation of Weighted Average Accumulated Expenditures Date Amount Capitalization Period Weighted Aver. Accumulated Expenditures 7/31 $ 300,000 x 3/12 = $ 75,000 11/1 -0- x 0 = -0-$ 75,000 Interest Revenue $ 150,000 x 8% x 3/12 = $ 3,000 Avoidable Interest Weighted Average Accumulated Expenditures x Interest Rate = Avoidable Interest $ 75,000 x 10% = $ 7,500 Total Interest Incurred for Year $ 450,000 x 10% x 5/12 = $ 18,750 $ 45,000 x 6% = $ 2,700 $ 21,450 Journal Entries: 7/31/ Cash $ 450,000 Note Payable $ 450,000 7/31/ Machinery $ 300,000 Cash $ 300,000 7/31 Investment $ 150,000 Cash $ 150,000 11/1 Cash $ 153,000 Investment $ 150,000 Interest Revenue 3,000 12/31 Machine $ 7,500 Interest Expense $ 13,950 Cash $ 2,700 Interest Payable $ 18,750 2...
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Chapter 10 Capitalization of Interest Examples and...

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