Question

On July 31, 2017, Concord Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery, Construction was begun immediately and was completed on November 1, 2017. To help finance construction, on July 31 Concord issued a $303,600, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $196,600 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 Concord made a final $107,000 payment to Minsk. Other than the note to Netherlands, Concord's only outstanding liability at December 31, 2017, is a $32,200, 8%, 6-year note payable, dated January 1, 2014, 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 2017. Interest revenue Weighted average accumulated expenditures Avoidable interest Interest capitalized Prepare the journal entries needed on the books of Concord Company at each of the following dates. (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 o for the amounts.) (1) July 31, 2017. (2) November 1, 2017. (3) December 31, 2017. Credit

Answer 1

Interest revenue:

Interest payable on 8% 6-year note payable on December 31

$ 32200 x 8% = $ 2576

Weighted average accumulated expenditure:

Total capitalization cost x months of capitalized project/12

$ 303600 x 3/12 =$ 75900

Avoidable interest: Interest that could have been avoided if the 3-year 12% note were not issued.

$ 303600 x 12% x 5/12 = $ 15180

Interest is taken for five months as question has asked for interest of 2017.

Interest capitalized: Interest attributable to the qualifying asset for which it is incurred must be capitalized. The interest earned from marketable securities must be subtracted to arrive at the net interest cost to be capitalized.

$ 303600 x 12% x5/12 - $ 107000 x 10% x 3/12 = $ 12505

Journal entries:

July 31 Cash $ 303600

12% Note payable $ 303600

July 31 Minsk tooling company $ 196600

Short term securities $ 107000

Cash $ 303600

Nov 1 Cash $ 109675

Short term securities $ 107000

Factory machine $ 2675

Being interest received on investments credited or reduced from cost of machine. As it is directly related to the qualifying asset.

Nov 1 Minsk tooling company $ 107000

Cash $ 107000

Dec 31 Factory machine $ 15180

Interest accrued on 12% note $ 15180

Interest cost for 5 months accrued and the same has been added to our machine cost as it is directly related. Since it is to be paid on next year July 31, the same is accrued as liability.

Dec 31 Interest revenue expense $ 2576

Cash $ 2576