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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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