Question

Exercise 10-09 On July 31, 2020, Cullumber Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction begun immediately and was completed on November 1, 2020. To help finance construction, on July 31 Cullumber issued a $278,400, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $188,400 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Cullumber made a final $90,000 payment to Minsk. Other than the note to Netherlands, Cullumber's only outstanding liability at December 31, 2020, is a $32,000, 8%, 6-year note payable, dated January 1, 2017, on which interest is payable each December 31. Calculate the interest revenue, weighted average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2020. Interest revenue Weighted average accumulated expenditures to Avoidable interest o Interest capitalized to

Answer 1

1) interest revenue = (278400-188400)*10%*3/12
interest revenue = 2250
2)
date	amount	month	weighted average accumulated exp
31-07-2020	188400	3/12	47100
01-11-2020	90000	0/12	0
total	278400
weighted average accumulate exp			47100
3) avoidable interest = 5652
4) interest capitalized = 47100*12% = 5652
total interest exp = (278400*12%)*5/12+(32000*8%)
total interest exp = 13920+2560 =16480
actual ineterst exp = 16480-5652 = 10828
Journal entries
date	Particulars			Debit	credit
01-Jul	cash			278400
	12% notes payable				278400
	(to record note)
	factory machine			188400
	trading securities			90000
	cash				278400
	(to record payment to minsk)
01-Nov	cash			92250
	trading securities				90000
	interest revenue				2250
	(to record sale of investment)
	factory machine			90000
	cash				90000
	(to record payment to minsk)
31-Dec	factory machine			5652
	interest expenses			10828
	cash (32000*8%)				2560
	interest payable (188400*12%)*5/12				13920
	(to record interest expenses)