Question

On December 31, 2019, Sarasota Inc. borrowed $4,140,000 at 13% payable annually to finance the construction of a new building. In 2020, the company made the following expenditures related to this building: March 1, $496,800; June 1, $828,000; July 1, $2,070,000; December 1, $2,070,000. The building was completed in February 2021. Additional information is provided as follows. 1. Other debt outstanding 10-year, 14% bond, December 31, 2013, interest payable annually $5,520,000 6-year, 11% note, dated December 31, 2017, interest payable annually $2,208,000 2. March 1, 2020, expenditure included land costs of $207,000 3. Interest revenue earned in 2020 $67,620 Determine the amount of interest to be capitalized in 2020 in relation to the construction of the building.

The amount of interest is ?

Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

Required 1 :

To calculate the amount of interest to be capitalized and Interest expenses at December 31,2020

Expenditures in 2020	Amount($)	Months	Average investment
Mar-01	$ 496,800	10/12	$ 414,000                       {$496,800 * 10/12 }
Jun-01	$ 828,000	7/12	$ 483,000                        {$828,000*7/12    }
Jul-01	$ 2,070,000	6 /12	$ 1,035,000                   {$2,070,000* 6/12 }
Dec-01	$ 2,070,000	1/12	$ 172,500                       {$2,070,000*1/12 }
			$ 2,104,500
Note 1:
During construction ,interest on land expenditure is capitalized to building cost but not land

Average investment	interest rate	Avoidable interest cost
$ 2,104,500	13%	$ 273,585                     {$2,104,500 *13 % }
		$ 273,585

Loans	Amount($)	Issued	Actual interest cost
13% to finance construction	$ 4,140,000	12/31/2019	$ 538,200                       {$4,140,000* 13 %}
14 % Bond	$ 5,520,000	12/31/2013	$ 772,800                       {$5,520,000* 14 %}
11 % Note	$ 2,208,000	12/31/2017	$ 242,880                     {$2,208,000 * 11 % }
			$ 1,553,880

Hence ,

Capitalization of interest at December 31, 2020 = $ 273,585

Interest expenses at December 31,2020 = { $ 1,553,880 - $273,585 } = $ 1,280,295

Required 2 :

Date	General Journal	Debit	Credit
12/31/2020	Building	$ 273,585
	Interest expense {$1,553,880 -$273,585}	$ 1,280,295
	Cash		$ 1,553,880
	( To record capitalization of interest and
	the recognition of interest expense)