Blank built a new plant for its own use on land that it acquired in 2015...
- Blank built a new plant for its own use on land that it acquired in 2015 with a cost of $500,000. Construction commenced on January 1, 2017 and was completed on December 31, 2017. Reno had the following debt during the construction period:
Construction Loan for the new plant = $500,000 @ 7%
Other unrelated debt:
Bank Loan = $1,000,000 @ 5%
Construction Expenditures (excluding land):
July 1 = $ 1,000,000
- Prepare the journal entry to capitalize the interest on the construction of the building assuming interest expense for all the debt has already been recorded.
Homework Answers
Interest expense incurred on construction loan for the new plant is to be capitalized as is it a specific borrowing towards the construction of the asset.
Capitalization of interest ceases when the construction completes.
Period for which interest is to be capitalized is from Jan 1, 2017 to Dec 31,2017
Interest expense on construction loan = 500,000*7/100
= $35,000
It is given in the question that interest expense is already recorded hence the entry to capitalize the interest is as follows,
Dr. Plant (Asset) $ 35,000
Cr. Interest expense $ 35,000
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