On February 1, 2007 the Caper Manufacturing Co. began construction of a building to be used as corporate offices. The building was completed on September 30,2008.
Expenditures on the project were as follows:
March 1, 2007 $ 200,000
April 30, 2007 600,000
August 31, 2007 1,000,000
November 30, 2007 1,300,000
June 1, 2008 500,000
July 31, 2008 100,000
September 1, 2008 600,000
On January 1, 2007, the company obtained a $1 million, 5 year construction loan with a 10 % interest rate. The company’s other interest-bearing debt included two long-term debt notes of $1,000,000 and $500,000 with interest rates of 6% and 8% respectively. Both notes were outstanding during all of 2007 and 2008. The company’s fiscal year-end is December 31.
a) Prepare the journal entry recording the amount of interest that Carter should capitalize in 2007 using the specific interest method.
b) Prepare the journal entry recording the amount of interest that Carter should capitalize in 2008 using the specific interest method.
c) What is the cost of the building at December 31, 2007 and December 31, 2008?
d) Calculate the amount of interest expense that will appear in the 2007 and 2008 income statements.