(Capitalization of Interest) McPherson Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2012. McPherson expected to complete the building by December 31, 2012. McPherson has the following debt obligations outstanding during the construction period.
|
Construction loan—12% interest, payable semiannually, issued |
$2,000,000 |
|
Short term loan—10% interest, payable monthly, and principal payable |
1,600,000 |
|
Long term loan—11% interest, payable on January 1 of each |
1,000,000 |
Instructions
(a) Assume that McPherson completed the office and warehouse building on December 31, 2012, asplanned at a total cost of $5,200,000, and the weighted average of accumulated expenditures was $3,800,000. Compute the avoidable interest on this project.
(b) Compute the depreciation expense for the year ended December 31, 2013. McPherson elected to depreciate the building on a straight line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000.
E10 8 (Capitalization of Interest) On December 31, 2011, Hurston Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building. In 2012, the company made the following expenditures related to this building: March 1, $360,000; June 1, $600,000; July 1, $1,500,000; December 1, $1,200,000. Additional information is provided as follows.
1. Other debt outstanding 10 year, 11% bond, December 31, 2005, interest payable annually $4,000,000 6 year, 10% note, dated December 31, 2009, interest payable annually $1,600,000
2. March 1, 2012, expenditure included land costs of $150,000
3. Interest revenue earned in 2012 $49,000
Instructions
(a) Determine the amount of interest to be capitalized in 2012 in relation to the construction of the building.
(b) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2012.